10-K 1 d616356d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             .

Commission file number: 000-50812

 

 

MULTI-FINELINE ELECTRONIX, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   95-3947402

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

8659 Research Drive Irvine, California   92618
(Address of principal executive offices)   (Zip Code)

(949) 453-6800

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

  Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

  NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer    ¨

   Accelerated filer    x

Non-accelerated filer    ¨  (Do not check if a smaller reporting company)

   Smaller reporting company    ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of Common Stock held by non-affiliates of the registrant (based upon the closing sale price per share of Common Stock on the NASDAQ Global Select Market on March 28, 2013) was $135,828,130. Shares held by each executive officer, director and by each person that owns 10% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of October 31, 2013 was 24,082,802.

DOCUMENTS INCORPORATED BY REFERENCE

Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12 (as to Beneficial Ownership), 13 and 14 of Part III incorporate by reference information from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2014 Annual Meeting of Stockholders.

 

 

 


Table of Contents

Multi-Fineline Electronix, Inc.

Index

 

PART I

  

Item 1.

  Business      1   

Item 1A.

  Risk Factors      14   

Item 1B.

  Unresolved Staff Comments      27   

Item 2.

  Properties      28   

Item 3.

  Legal Proceedings      28   

Item 4.

  Mine Safety Disclosures      28   

PART II

  

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     29   

Item 6.

  Selected Financial Data      31   

Item 7.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   

Item 7A.

  Quantitative and Qualitative Disclosures About Market Risk      42   

Item 8.

  Financial Statements and Supplementary Data      43   

Item 9.

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      73   

Item 9A.

  Controls and Procedures      74   

Item 9B.

  Other Information      75   

PART III

  

Item 10.

  Directors, Executive Officers and Corporate Governance      76   

Item 11.

  Executive Compensation      76   

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     76   

Item 13.

  Certain Relationships, Related Transactions, and Director Independence      76   

Item 14.

  Principal Accounting Fees and Services      77   

PART IV

  

Item 15.

  Exhibits, Financial Statement Schedules      78   
  Signatures      80   


Table of Contents

This Annual Report on Form 10-K (“Annual Report”) contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they prove incorrect or never materialize, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The forward-looking statements are contained principally in Item 1—“Business,” Item 1A—“Risk Factors” and Item 7—“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” but may also appear in other areas of this Annual Report. Such forward-looking statements include any expectation of earnings, revenues or other financial items; any statements regarding the use of working capital, anticipated growth strategies and the development of and applications for new technology; factors that may affect our operating results; statements concerning our customers and diversification of our customer base; statements concerning new products or services; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” or “plan,” and similar expressions or variations. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed under Part I, Item 1.A. “Risk Factors” in this Annual Report, and such forward looking statements are qualified in their entirety by reference to such risk factors. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. New factors emerge from time to time, and their emergence is impossible for us to predict. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Part I

 

Item 1. Business

Overview

We are one of the world’s largest producers of flexible printed circuits and flexible circuit assemblies. With facilities in Irvine, California; Suzhou, China; Chengdu, China; Cambridge, England; Korea; Taiwan; and Singapore, we offer a global service and support base for the sale, design and manufacture of flexible interconnect solutions.

We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that provide a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We currently target our solutions within the electronics market and, in particular, our solutions enable our customers to achieve a desired size, shape, weight or functionality of the device. Current examples of applications for our products include mobile phones, smartphones, tablets, personal computers, consumer products, portable bar code scanners, computer/data storage and medical devices. We provide our solutions to original equipment manufacturers (“OEMs”) such as Apple, Inc. and to electronic manufacturing services (“EMS”) providers such as Foxconn Electronics, Inc., Protek (Shanghai) Limited and Flextronics International Ltd. Our business model, and the way we approach the markets which we serve, is based on value added engineering and providing technology solutions to our customers facilitating the miniaturization of portable electronics. We currently rely on a core mobility end-market for nearly all of our revenue. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets do, and changes in market leadership can occur with little to no warning. Through early supplier involvement with customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through value added component assembly of

 

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components on flex, we seek to provide a higher level of product within their supply chain structure. This approach is relatively unique and may or may not always fit with the operating practices of all OEMs. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s revenue to total revenues during any reporting period.

We are party to several contracts with our customers. These contracts generally provide that we will manufacture products for the customers against purchase orders delivered by the customers or their subcontractors. The contracts provide for no minimum purchase obligations, but do generally contain terms regarding timing of payment, product delivery, product quality controls, confidentiality, ownership of intellectual property and indemnification. Additional terms may also be included in specific purchase orders. Some of these contracts also contain provisions that require us to pay damages if we fail to perform our obligations under the contracts.

We typically have numerous programs in production at any particular time, the life cycle for which is typically around one year. The programs’ prices are subject to intense negotiation and are determined on a program by program basis, dependent on a wide variety of factors, including without limitation, competitor pricing, expected volumes, assumed yields, material costs, and the amount of third party components within the program. Our profitability is dependent upon how we perform against our targets and the assumptions on which we base our prices for each particular program. Our volumes, margins and yields also vary from program to program and, given various factors and assumptions on which we base our prices, are not necessarily indicative of our profitability. In fact, some lower-priced programs have higher margins while other higher-priced programs have lower margins. Given that the programs in production vary from period to period and the pricing and margins between programs vary widely, volumes, while important for overhead absorption, are not necessarily indicative of our performance. For example, we could experience an increase in volumes for a particular program during a particular period, but depending on that program’s margins and yields and the other programs in production during that period, those higher volumes may or may not result in an increase in overall profitability. In the mobility market, the first few months of production are the most critical in terms of growth and profitability opportunities.

Our historical growth has been due, in part, to our early supplier involvement allowing our engineers to gain an understanding of the application and use of the customers’ circuits. This knowledge allows our engineers to utilize their expertise in flex circuit design and assist in the selection of materials and technologies to provide a high quality and cost effective product. Vertically integrated flex circuit manufacturing, assembly and tooling operations have allowed us to offer superior lead time support to facilitate customer requirements. We believe the early involvement and knowledge of the specific customer flexible assemblies and designs of these assemblies allows us to ramp production at a very fast pace, creating a competitive advantage. The speed and certainty of the production ramp is critical to our customers who view time to market as a key success factor.

We were incorporated as Multi-Fineline Electronix, Inc. in California in October 1984. In connection with our initial public offering, we reincorporated as Multi-Fineline Electronix, Inc. in Delaware on June 4, 2004. References in this Annual Report to “we,” “our,” “us,” the “Company” and “MFLEX” refer to Multi-Fineline Electronix, Inc. and our consolidated subsidiaries: two located in the People’s Republic of China: MFLEX Suzhou Co., Ltd. (“MFC”), formerly known as Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”) and into which Multi-Fineline Electronix (Suzhou) Co., Ltd (“MFC1”) was merged in fiscal 2010, and MFLEX Chengdu Co., Ltd. (“MFLEX Chengdu”); one located in the Cayman Islands: M-Flex Cayman Islands, Inc. (“MFCI”); one located in Singapore: Multi-Fineline Electronix Singapore Pte. Ltd. (“MFLEX Singapore”); one located in Malaysia: Multi-Fineline Electronix Malaysia Sdn. Bhd. (“MFM”); one located in Arizona: Aurora Optical, Inc. (“Aurora Optical”), which was dissolved in September 2012; one located in Cambridge, England: MFLEX UK Limited (“MFE”); one located in Korea: MFLEX Korea, Ltd. (“MKR”); and one located in the Netherlands: MFLEX B.V. (“MNE”); except where it is made clear that the term means only the parent company.

 

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Industry Background

We believe that the global market for flexible printed circuits (“FPCs”) will continue to grow over the coming years as consumers continue to demand smaller, more functional, portable devices. Given their inherent design and cost advantages, flexible printed circuits will remain a favored solution for electronics OEMs that strive to increase the features and functionality of electronic devices while optimizing the size, shape and weight of such devices.

Historically, electronics manufacturers have relied upon rigid printed circuit boards (“PCBs”) to provide the electrical interconnections between the components in electronics devices. A PCB consists of an array of copper wires sandwiched between layers of fiberglass that then has multiple microprocessors, transistors and other components attached to its surface. Much like PCBs, a flexible printed circuit assembly (“FPCA”) is a similarly-produced array of copper wires with the same types of components mounted to its surface. However, FPCAs contain thinner, flexible and lighter, polymer-based materials in place of the bulkier fiberglass, epoxy-based material in a PCB.

PCBs are inherently thick and cannot bend or twist and they are relatively heavy. In contrast, a thinner, lighter FPC can bend, fold over itself and twist to better fit microprocessors and other electrical components such as connectors, switches, resistors, capacitors and light-emitting devices into smaller, non-linear spaces. In the past, FPC technologies and material sets were reserved for specialty uses, as they were difficult and costly to produce. Today, they are used in devices where size and form factor are important considerations, such as smartphones and tablets.

Having found innovative ways to produce a wide range of FPCs in mass volumes at increasingly affordable prices, companies began offering consumer electronics manufacturers new FPC and FPCA based materials and technologies that enabled design engineers to innovate interconnect and packaging solutions for increasingly portable and stylish electronic devices.

In addition to these functional advantages, we provide engineering and manufacturing support for assembling components onto flexible circuits to enable OEMs to design and construct modular components that can be incorporated into the final product. The integration of the circuit fabrication and component assembly “under one roof” reduces the complexity of the assembly of the final product, simplifies the supply chain for procuring FPCAs and reduces the overall manufacturing costs to produce a device.

Looking forward, we believe that the overall market for FPCs and FPCAs is poised for substantial growth over the next several years as a result of favorable technological and market developments, including:

 

   

Increased Portability and Complexity of Electronic Devices. As electronic devices become more functional, complex and compact, product size and electrical performance become the major design factors. From an engineering standpoint, FPCs possess inherently better overall interconnect solution than PCBs. The reasons are that the materials used in building FPCs offer good electrical signal integrity and better heat dissipation. The polymer-based FPC materials offer better physical and electrical properties than the epoxy-based materials in PCBs. As a result, the electronics industry is increasingly relying upon FPCs and FPCAs to meets its increasingly demanding design needs.

 

   

Outsourcing. Due to increasing complexity and miniaturization of smartphones and tablets, we believe electronics companies continue to rely heavily upon outsourcing to technically-qualified, strategically-located manufacturing partners to provide integrated, end-to-end flexible printed circuit and component assembly solutions. By employing end-to-end manufacturers with full-service FPC/A design and application engineering, prototyping, and competitive high-volume production services, electronics companies are able to reduce time-to-market, avoid product delays, reduce manufacturing costs, minimize logistical problems, and focus on their core competencies.

 

   

Expanding Markets and Flexible Component Demand. Global demand for increasingly-complex portable computing and communication products are driving the demand for more complex FPCAs.

 

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We believe that the application of flex assemblies in wireless and other electronic devices is expanding, and the expansion of demand could result in significantly more flex assemblies per device than have been used in previous-generation product applications.

Competitive Strengths

We are a leading global provider of high-quality, technologically advanced flexible printed circuit and component assembly solutions to the electronics industry. We believe the competitive strengths that differentiate us from other contract manufacturers that might compete with us include:

 

   

Our Seamless End-to-End Solution for Flexible Printed Circuit Applications. We provide a seamless, efficient and integrated end-to-end FPC and FPCA solution for our customers. This full-service, “under one roof,” offer includes design and application engineering, prototyping and high-volume manufacturing to turnkey component assembly and testing. By relying on a single provider early in the product development lifecycle for their flexible printed circuit requirements, our customers can benefit from a robust, customized product design and development process. This, in turn, frequently leads to production cost savings and quicker time to volume in the market. We possess the expertise and capabilities to provide a seamless, integrated, end-to-end mass production solution that provides our customers with the ability to leverage any one or more of our facilities to meet their global requirements.

 

   

Our Design and Application Engineering Expertise. We assist customers at the earliest stages of product development with engineering expertise and a knowledge base of product applications. This level of experience and expertise, combined with early design-participation, enables us to gain intimate knowledge of our customers’ interconnect and packaging design challenges and to provide value-added engineering support. Our history of successful early design-participation fosters strong relationships with our customers, often resulting in their reliance on our engineering support for the life of a specific application and subsequent generations of similar applications. We are also continuing to enhance our design and application engineering capabilities in China, Korea, and Taiwan to best position us to provide an integrated end-to-end solution to the emerging domestic electronics markets in China and other parts of Asia.

 

   

Our Manufacturing Capabilities. Our China manufacturing facilities are organized to ramp production of new products from prototype stage to high volume in a cost-efficient manner. Our ongoing efforts to expand our manufacturing facilities with technologically-advanced, automated manufacturing and handling machinery allows us to improve our product yields, streamline our customers’ supply chains, shorten our customers’ time to the market and lower the overall costs of our products. We continue to add new, customized equipment that increases our capability and capacity to meet our customers’ technology needs. While we believe our China manufacturing facilities benefit the Company, they do subject us to additional risks inherent in international business, including, among others, those detailed under Item 1A, “Risk Factors” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk.”

 

   

Our Management Experience and Expertise. Our management team has been with us for many years. During that time, our executive management has made a number of critical, strategic decisions to manage our business, including pursuing a strategy of deploying our design and application engineers at the early stages of a customer’s product designs; responding to the trend of OEM outsourcing; identifying China’s manufacturing capabilities; and creating a seamless, integrated end-to-end solution in our China operations to serve the needs of multinational OEMs and EMS providers.

 

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Business Strategy

Our objective is to continue to expand our customer base and product offerings by using our core technologies of high-quality, technologically advanced flexible printed circuits and assemblies. In order to maintain an optimum profitability, we strive to utilize our capacity with the most attractive customer orders available to us. To achieve our objective, we intend to continue our pursuit of the following strategies:

 

   

Provide an Integrated Solution to Our Customers. We intend to maintain our leadership in providing a complete end-to-end solution to our customers that includes design and application engineering, prototyping, high-volume manufacturing, materials acquisition, component assembly and testing.

 

   

Support the Development of Flexible Printed Circuit Technology for New Applications. We believe that flexible printed circuit technology provides a cost-effective solution to improving the functionality and packaging of electronic devices. We believe that the trend toward miniaturization has and will continue to drive the growth of flexible printed circuits in many new applications and devices in the future. To address these new opportunities, we will continue our efforts to research, develop and market new applications for flexible printed circuits and component assemblies. We believe that our design and application engineering and manufacturing capabilities, coupled with our flexible printed circuit assembly expertise, will enable us to effectively target additional high-volume flexible printed circuit applications in various markets of the electronics industry where functionality, size, shape and weight are primary drivers of product development.

 

   

Expand Our Existing Expertise in the Design and Manufacture of Flexible Printed Circuit Technology. By expanding our market share in existing markets and partnering with customers in the early stage design of their products, we strive to continue to expand our engineering and manufacturing expertise and capabilities for applications and functionality for electronic product packaging technology and to assist our customers in developing more efficient manufacturing processes for their products. We believe that we will be able to continue to capture market share in the sectors we serve and attract other companies from the electronics industry by utilizing our expertise in design and application engineering to expand product designs and applications for flexible printed circuit solutions in conjunction with our high-volume, cost-effective manufacturing capabilities.

 

   

Diversify Our End Customers. We primarily serve the mobility market. Mobility refers to an overall end-market of portable devices that provides access to data (content) and applications that were previously confined to the desktop, server, cloud or living room. We plan to continue to leverage our internal sales force comprised of design and application engineers with our existing outside non-exclusive sales representatives to pursue new customers in the mobility market, as well as in other sectors of the electronics industry where mobility, functionality and packaging size dictate the need for flexible printed circuits and component assemblies, including the automotive market.

 

   

Increase Manufacturing Capabilities. We continue to invest in advanced manufacturing, automation and engineering capabilities in China. By continuing to expand these capabilities, we can offer our customers technologically advanced manufacturing process for complex FPC fabrication in mass production volumes.

 

   

Increase Intellectual Property Content of Our Products. We are investing in advanced technologies and enhancing our research and development centers to be able to innovate and offer differentiated solutions to our customers. By offering differentiated capabilities, we hope to increase our gross margin percentage over time.

 

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Products

Our design and application engineering expertise enables us to offer flexible printed circuit and value-added component assembly and module assembly solutions for a wide range of electronic applications. We offer products in a broad range of sectors, including mobile phones, smartphones, tablets, personal computers, consumer products, portable bar code scanners, computer/data storage and medical devices.

Flexible Printed Circuits. Flexible printed circuits, which consist of copper conductive patterns that have been etched or printed while affixed to flexible substrate materials such as polyimide or polyester, are used to provide connections between electronic components and as a substrate to support these electronic devices. The circuits are manufactured by subjecting the base materials to multiple processes, such as drilling, screening, photo imaging, etching, plating and finishing. We produce a wide range of flexible printed circuits, including single-sided, double-sided multi-layer (with and without gaps between layers) and rigid-flex. Single-sided flexible printed circuits, which have an etched conductive pattern on one side of the substrate, are normally less costly and more flexible than double-sided flexible printed circuits because their construction consists of a single patterned conductor layer. Double-sided flexible printed circuits, which have conductive patterns or materials on both sides of the substrate that are interconnected by a drilled and copper-plated hole, can provide either more functionality than a single-sided flexible printed circuit by containing conductive patterns on both sides, or greater shielding of components against electromagnetic interference than a single-sided flexible printed circuit by covering one side of the circuit with a shielding material rather than a circuit pattern. Multi-layer and rigid-flex printed circuits, which consist of layers of circuitry that are stacked and then laminated, are used where the complexity of the design demands multiple layers of flexible printed circuitry. If some of the layers of circuitry are rigid printed circuit material, the product is known as a rigid-flex printed circuit. Gapped flexible printed circuits, which consist of layers of circuitry that are stacked and separated in some parts of the circuit, and laminated in other parts of the circuit, are used where the complexity of the design demands multiple layers of flexible printed circuitry but the flexibility of a single-sided flexible printed circuit in some parts of the circuit.

Flexible Printed Circuit Assemblies. Flexible printed circuits can be enhanced by attaching electronic components, such as connectors, switches, resistors, capacitors, light emitting devices, integrated circuits, cameras, optical sensors and other microelectronic mechanical sensor (“MEMS”) devices to the circuit. The reliability of flexible printed circuit component assemblies is dependent upon proper assembly design and the use of appropriate fixtures. Connector selection is also important in determining the signal integrity of the overall assembly, a factor which is very important to devices that rely upon high system speed to function properly. We are one of the pioneers in attaching connectors and components to flexible printed circuits and have developed the expertise and technology to mount a full range of electronic devices, from ordinary passive components to advanced and sophisticated surface mount components.

Mechanical Integration of Flexible Printed Circuit Assemblies. Three dimensional packaging solutions for smartphones, tablets and other consumer electronic devices can be enhanced by integrating mechanical components (metal and plastic chassis using mechanical joining techniques compared to electronic assembly) onto flexible printed circuit assemblies.

Printed Electronics and SmartInk™. An alternative way of producing Flexible Printed Circuits may employ printing of electrically conductive inks on flexible dielectric substrates. Through our investments in the past few years, we have acquired and developed intellectual property and patented processes and have created ink and dielectric formulations that allow us to produce circuits using this methodology. Furthermore, we have created a morphing display technology through the use of our SmartInk™, which enables us to produce a low cost display which can be used as a primary user-interface for devices such as remote controls and laptop keyboards or key strips. We have not sold these solutions in high volume production, but we have recently increased our investment and engineering capabilities in anticipation of commercializing these products and incorporating them in high volume market applications.

 

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Customers

Our customers include leading OEMs and EMS providers in a variety of sectors of the electronics industry. These sectors include mobile phones and smartphones, tablets, personal computers, consumer products, portable bar code scanners, computer/data storage and medical devices, and are primarily in what we refer to as the mobility market. Our expertise in flexible printed circuit design and component assembly enables us to assist our customers in resolving their design challenges through our design and assembly techniques, which can enhance the likelihood of us becoming the main provider for flexible printed circuits and component assembly included in that product. Achieving status as a main provider to an OEM for a high-volume program can enable us to build strong customer relationships with respect to existing products and any future product that requires the use of flexible printed circuits and component assemblies.

We sell our products by first working with OEMs in the design of their programs. Assuming we get a “design win,” the OEM then informs us of the percentage of the program it intends to buy from us (our “allocation”), and instructs the EMS providers to purchase products from us based on this allocation to be incorporated into the OEM’s program. We then “tool-up” (design or buy equipment, materials and components) for the program based on a forecast from the OEM, and build the product based the OEM’s forecast. Once the product is built, we ship it to hubs, where the EMS companies then pull the product when they need it to build for the OEM. Our relationships with EMS providers normally are directed by the OEMs. Therefore, it is typically the OEMs that negotiate product pricing and volumes directly with us, even though the purchase orders come from the EMS providers. Our obligation is typically to keep a certain amount of product, based on the OEM’s forecast, in the hub.

Although our product is built to the OEMs specifications and quality requirements, the EMS companies are the ones who determine when to pull our product from the hubs, and also determine whether to pull our product, or the product of one of our competitors. If the EMS provider decides not to pull our product, which could happen for any number of reasons, including a change by the EMS provider in the quality criteria of the product, we could be left with excess or obsolete inventory in the hubs. Some examples of EMS providers we sell to include Foxconn Electronics, Inc., Protek (Shanghai) Limited and Flextronics International Ltd.

For the past several years, a substantial portion of our net sales has been derived from products that are incorporated into products manufactured by or on behalf of a limited number of key customers and their subcontractors. For the fiscal year ended September 30, 2013, approximately 90% of our net sales were to three customers in the aggregate. In addition, approximately 75%, 74% and 44% of our net sales were to Apple, Inc., inclusive of net sales made to its designated subcontractors, in each of the fiscal years ended September 30, 2013, 2012 and 2011, respectively, and approximately 86%, 90% and 86% of our net sales were to Apple, Inc. and BlackBerry Limited, inclusive of sales made to their designated subcontractors, in each of the fiscal years ended September 30, 2013, 2012 and 2011, respectively.

Our results are highly dependent upon the success of these customers in the marketplace and our success in maintaining or growing our market share with them. Refer to Item 1A, “Risk Factors,” and in particular, the “Risks Related to Our Business” for more information about our reliance on our customers.

Our net sales fluctuate from quarter to quarter as a result of changes in demand for our products from our customer base. Over recent years, we have experienced a strong first fiscal quarter, followed by reduced net sales in the second fiscal quarter, as a result of partial seasonality of our major customers and the markets that we serve. This pattern may change depending upon market reception and sales volumes for any large OEM program, as at any given time, one OEM program can represent a significant part of our sales within a particular quarter. Our major customers provide consumer-related products that historically have experienced their highest sales activity during the calendar year-end holiday season. As a result, we typically experience a decline in our second fiscal quarter sales as the holiday period ends. Our net sales and operating results have fluctuated significantly from period-to-period in the past and are likely to do so in the future.

 

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Our facilities enable us to manufacture products for shipment anywhere in the world. Information regarding shipments by geographic area is summarized below:

 

     Fiscal Years Ended September 30,  
           2013                 2012                 2011        

United States

     2     4     9

Mexico

     1     5     20

Canada

     0     1     3

China

     74     56     23

Hong Kong

     17     29     35

Singapore and Malaysia

     0     1     1

Europe

     1     2     9

Other

     5     2     0
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

Sales and Marketing

We sell our products primarily through our global sales and program management organizations who meet regularly with our customers and potential customers, by providing electronic packaging solutions related to our products and enabling technologies that create customer differentiation and market advantage. Our market and product teams have successfully expanded our market penetration in each sector of the electronics industry that we targeted by leveraging our design and application engineers within each of these teams. We then design and manufacture our products to agreed-upon customer specifications.

Throughout fiscal 2013, we engaged the services of non-exclusive sales representatives located throughout North America and Asia to provide customer contacts and market our products directly to our global customer base. We rely on these sales representatives to create, build and maintain our customer relationships.

As of September 30, 2013, our backlog, which constitutes customer orders placed with us but that have not yet shipped, was $161.7 million. We expect to ship this backlog during fiscal year 2014. We cannot guarantee that our customers will not cancel any or all of the orders in our backlog and, in addition, our current backlog is not indicative of our future operating results. As of September 30, 2012, our backlog was $271.3 million.

Technology

We are a global provider of single, double-sided, multi-layer and air-gapped flexible printed circuit and component assemblies. We use proprietary processes and chemical recipes, which coupled with our innovative application engineering, design expertise and manufacturing experience, enables us to deliver high-unit volumes of complex flexible printed circuits and component assemblies at cost-effective yields.

Design Technology. The flexible printed circuits we manufacture are designed specifically for each application, frequently requiring significant joint design activities with the customer at the start of a project. We have developed design methodologies that solve difficult interconnection problems and save our customers time and money. We design and mass produce flexible printed circuits that range from single-sided circuits to more complex double-sided and multi-layer (with and without gaps between layers). We continually are investing in and improving our computer-based design tools to more quickly design new flexible printed circuits, enhance cooperative design and communication with our customers and more closely integrate design and application engineering to our prototyping and manufacturing process.

Circuit Fabrication Technology. We have extensive experience producing fine-line flexible printed circuits and have developed manufacturing processes that are designed to deliver high-unit volumes at cost-effective

 

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yields. In the flexible printed circuit industry, fine-line flexible printed circuits are easier to construct as the thickness of the copper decreases. However, as the thickness of the copper or insulation layers decrease, the cost of fabrication increases. We have developed a manufacturing process to plate in selective regions of the circuitry pattern, such as around the holes used to connect the two sides of a flexible printed circuit. In addition, the normal manufacturing technology, by itself, has been improved with new equipment which enables thicker, less expensive copper to be etched down precisely enough to form fine-line circuitry. A portion of the new equipment includes roll-to-roll capabilities that allow the handling of materials in a continuous web. The combination of these processes allows us to achieve finer patterns without a substantial increase in costs and with generally acceptable yields. We continually invest in computerization and automation of our circuit fabrication technology to enhance our performance and better track production costs, product yields and process times.

In addition to fine-line techniques, we have developed a proprietary process using lasers to drill very small diameter holes, known as micro-vias, for the connection of circuits on the reverse side of the substrate. The combination of multi-layer flexible circuits with fine-lines and micro-vias are part of the new High-Density Interconnect (“HDI”) technology that is one of our competitive strengths.

Component Assembly and Test Technology. Our component assembly and test technology involve the arrangement of the circuits on a panel to minimize material waste and facilitate requirements for component assembly, such as placing tooling holes, optical locators for vision-based machines, test points and pre-cut zones to allow part removal without compromising the integrity of the components. We assemble passive electrical and various mechanical components, including capacitors, resistors, integrated circuits, connectors, diodes and other devices to flexible printed circuits. We also perform advanced assembly of integrated circuit devices, as well as the functional testing of these flexible printed circuit component assemblies. Assembling these components directly onto the flexible printed circuit may enhance performance and reduce space, weight and cost. We continually invest in computerization and automation of our component assembly and test technology to enhance our performance and better track production costs, product yields and process times.

Intellectual Property

Our success will depend in part on our ability to protect our intellectual property. Our intellectual property relates to proprietary processes and know-how covering methods of designing and manufacturing flexible printed circuits, attaching components, process technology for circuit manufacturing, and embedded magnetics. We regularly require our employees to enter into confidentiality agreements and assignment of invention agreements to protect our intellectual property. In addition, we consider filing patents on our inventions that are significant to our business, although none of our existing patents or patent applications pertain to inventions that are significant to our current business. We also pursue trademarks where applicable and appropriate.

In the future, we may encounter disputes over rights and obligations concerning intellectual property and we cannot provide assurance that we will prevail in any such intellectual property dispute.

Suppliers

Generally we do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on third-party suppliers to provide these raw materials and components in a timely fashion and on commercially reasonable terms. We purchase raw circuit materials, process chemicals and various components from a limited number of outside sources. For components, we normally make short-term purchasing commitments to key suppliers for specific customer programs. These commitments are usually made for three to 12-month periods. These suppliers agree to cooperate with us in engineering activities, as required, and in some cases maintain a local inventory to provide shorter lead times and reduced inventory levels for us. In most cases, suppliers are approved and often dictated by our customers. For process chemicals, certain copper and polyimide laminate materials and certain specialty chemicals used in our manufacturing process, we rely on a limited number of key

 

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suppliers. Alternate chemical products are available from other sources, but process chemical changes often require approval by our customers and requalification of the processes, which could take weeks or months to complete. We seek to mitigate these risks by identifying stable companies with leading technology and delivery capabilities and by attempting to qualify at least two suppliers for all critical raw materials and components.

We, or our customers, may not be able to obtain the components or flex materials that are required for our customers’ programs, which in turn could forestall, delay, or halt our production or our customers’ programs. We expect that delays may occur in future periods for a variety of reasons, including, but not limited to, natural disasters. Furthermore, the supply of certain precious metals required for our products is limited, and our suppliers could lose their export or import licenses on materials we require, any of which could limit or halt our ability to manufacture our products. We may not be successful in managing any shortage of raw materials or components that we may experience in the future, which could adversely affect our relationships with our customers and result in a decrease in our net sales. Component shortages could also increase our cost of goods sold because we may be required to pay higher prices for components in short supply. In addition, suppliers could go out of business, discontinue the supply of key materials, or consider us too small of a customer to sell to directly, and could require us to buy through distributors, increasing the cost of such components to us. There are certain chemical materials used in our processes that are under review by regulatory authorities of various countries for their use in the fabrication processesfor FPCs or FPCAs. If such materials are banned, or if we are prohibited from importing such materials into the countries in which we operate, we will be forced to find alternatives, which may or may not exist, or may not be acceptable for use by our customers.

Furthermore, we are increasingly being required to purchase materials and components before our customers are contractually committed to an order. Refer to the risk factor entitled “Our customers have in the past and likely will continue to cancel their orders, change production quantities, delay production or qualify additional vendors, any of which could reduce our net sales, increase our expenses and/or cause us to write down inventory” in Item 1A, “Risk Factors” for more information.

Competition

The flexible printed circuit market is extremely competitive, with a variety of large and small companies offering design and manufacturing services. The flexible printed circuit market is differentiated by customers, applications and geography, with each niche requiring specific combinations of complex packaging and interconnection. We believe that our ability to offer an integrated, end-to-end flexible printed circuit solution has enabled us to compete favorably with respect to design capabilities; product performance, reliability and consistency; price; customer and application support; and resources, equipment and expertise in component assembly and integration of mechanical components including MEMS devices on flexible printed circuits.

We compete on a global level with a number of leading Asian providers, such as Nippon Mektron Ltd., Flextronics International Ltd., Interflex Co. Ltd., Zhen Ding Technology Holding Ltd., HI-P (Shanghai) Technology Co. Ltd., Career Technology (MFG) Co. Ltd., Flexium Interconnect, Inc., TTM Technologies, Inc., Sumitomo Electric Industries Ltd., and Fujikura Ltd. We expect others to enter the market in the Asian region because of government subsidies and lower labor rates available there.

We believe that our technology leadership and capabilities in designing and manufacturing flexible printed circuits component assemblies and module assemblies have enabled us to build strong partnerships and customer relationships with many companies. We also believe that customers typically rely upon a limited number of vendors’ designs for the life of specific applications and, to the extent possible, subsequent generations of similar applications. Accordingly, it is difficult to achieve significant sales to a particular customer for any application once a different vendor has been selected to design and manufacture a specific flexible printed circuit. Any expansion of existing products or services could expose us to new competition. In addition, our competitors may devote significantly greater amounts of their financial, technical and other resources to market, develop and adopt competitive products, and those efforts may materially and adversely affect our market position. Moreover,

 

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competitors may offer more attractive product pricing or financing terms than we do as a means of gaining access to the markets in which we compete.

Employees

As of September 30, 2013, we employed approximately 9,150 full-time employees, of which approximately 55 were in the United States, approximately 9,035 were in China and approximately 60 were in other locations. We also employed approximately 8,160 contract employees in China although not all of these contract employees work a full-time work schedule.

We do not have employment agreements with any of our executive officers; however, we have entered into employment agreements with all of our employees in China. In general, these employment agreements provide for a three-year term and can be renewed for a one, two or three-year term. Starting in 2008, the employment agreements for employees in China are non-terminable by us once they are renewed for the third time.

A trade union was established at MFC on November 10, 2011. On that same day, an employee union charter was unanimously passed, a union committee and audit committee were elected by the employee representatives and an election of union officials was held. The tenure of union officials and committee members is three years. We consider our relationship with the trade union to be good.

Environmental Controls

Flexible printed circuit manufacturing requires the use of chemicals. As a result, we are subject to a variety of environmental laws relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used to manufacture our products in China. Given the extensive regulatory environment surrounding the use of hazardous materials and the uncertainties associated with any occurrence of environmental contamination, there can be no assurance that the costs of compliance or any alleged violations of applicable regulatory requirement, as well as any required remediation in the event of an environmental contamination, will not harm our business, financial condition or results of operations.

We have recently been notified that one of our facilities in Suzhou, China has a permit for only one wet process line. While the amount of discharge we release is within the total permitted amount for such facility, we do operate multiple wet process lines at such facility. We are currently working with the appropriate officials and regulatory bodies in China to resolve this permitting issue. At this time, we do not believe that the remediation of such issue will cause a material, adverse effect on our capital expenditures, earnings or competitive position, and we do not anticipate any material amount of environmental-related capital expenditures in the fiscal year 2014. However, we cannot predict the nature, scope or effect of potential penalties, legislation or regulatory requirements that could be imposed. In addition, we also cannot predict how existing or future laws or regulations will be administered or interpreted. Compliance with more stringent laws or regulations, more vigorous enforcement policies of regulatory agencies, or significant penalties (including the potential shut-down of unpermitted lines) could require substantial expenditures by us, cause us to lose manufacturing capacity (which could cause us to be unable to meet our customers’ demand), or could otherwise harm our business, results of operations and financial condition.

 

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Executive Officers of the Registrant

The following table sets forth information about our executive officers as of October 31, 2013:

 

Name

   Age     

Position(s)

Reza Meshgin

     50       President and Chief Executive Officer

Thomas Liguori

     55       Executive Vice President and Chief Financial Officer

Thomas Lee

     54       Executive Vice President of Operations

Christine Besnard

     43       Executive Vice President, General Counsel and Secretary

Lance Jin

     48       Executive Vice President of Business Development

Reza Meshgin joined us in June 1989, assumed his current position as our President and Chief Executive Officer in March 2008 and was elected to the Board of Directors in April 2008. Prior to his current role, Mr. Meshgin served as our President and Chief Operating Officer from January 2003 through February 2008, was Vice President and General Manager from May 2002 through December 2003, and prior to that time was our Engineering Supervisor, Application Engineering Manager, and Director of Engineering and Telecommunications Division Manager. Mr. Meshgin holds a B.S. in Electrical Engineering from Wichita State University and an M.B.A. from University of California at Irvine. Mr. Meshgin holds the following positions at our wholly owned subsidiaries: (a) Chairman of the board of directors for MFCI, MFLEX Singapore, MFM and MFE, (b) director for MFLEX, MNE, MFC and MFLEX Chengdu, (c) chief executive officer and president at MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MKR and MFM, (d) executive chairman at MFE, and (e) representative director for MKR.

Thomas Liguori joined us as Chief Financial Officer and Executive Vice President in February 2008. Prior to joining us, Mr. Liguori served as Chief Financial Officer at Hypercom, Inc. from November 2005 to February 2008, where he designed and built the global finance and administration functions. From February 2005 to November 2005, Mr. Liguori served as Vice President, Finance and Chief Financial Officer at Iomega Corporation, a publicly traded provider of storage and network security solutions, and from April 2000 to February 2005, as Chief Financial Officer at Channell Commercial Corporation, a publicly traded provider of designer and manufacturer of telecommunications equipment. Prior to that time, Mr. Liguori served as Chief Financial Officer of Dole Europe for Dole Food Company, serving as the top-ranking financial and IT executive in Dole’s operations in Europe, Africa and the Middle East, and as Vice President of Finance at Teledyne. Mr. Liguori holds a Bachelor’s in Business Administration, Summa Cum Laude, from Boston University and completed a Master’s in Business Administration in Finance, Summa Cum Laude, from Arizona State University. He is a Certified Management Accountant and a Certified Financial Manager. Mr. Liguori holds the following positions at our wholly owned subsidiaries: (a) director for MFCI, MFLEX Singapore, MFC, MFLEX Chengdu, MFM, MKR, MNE and MFE, (b) chief financial officer at MFCI, MFLEX Singapore, MFM, MKR and MFE and (c) legal representative for MFLEX Singapore in China for our two Chinese subsidiaries.

Thomas Lee joined us in October 1986 as our Supervisor of Photo Department and subsequently served as our Manufacturing Manager and Director of Operations from May 1995 to May 2002. Mr. Lee served as our Executive Vice President of Global Operations from May 2002 until March 2011, and as our Executive Vice President of Operations—Program Management from March 2011 until November 2012, when he transitioned to the position of Executive Vice President of Operations. Prior to joining us, Mr. Lee served as a Mechanical Engineer at the Agricultural Corporation in Burma. Mr. Lee holds a B.E. in Mechanical Engineering from the Rangoon Institute of Technology in Burma. Mr. Lee also holds the following positions at our wholly owned subsidiaries: (a) executive vice president at MFLEX Singapore, (b) executive vice president of operations—program management at MKR, (c) legal representative for MFC and MFLEX Chengdu, and (d) Chairman of the board of directors for MFC and MFLEX Chengdu.

Christine Besnard joined us as General Counsel in August 2004, assumed the role of Secretary in March 2005, was named Vice President in March 2006 and Executive Vice President in March 2011. Prior to joining us, Ms. Besnard was senior corporate counsel at Sage Software, Inc., from August 2000 to July 2004, and a

 

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corporate securities associate at Pillsbury, Madison & Sutro LLP. Ms. Besnard holds a bachelor’s degree in political science from San Diego State University and a juris doctor from the University of Southern California Law Center. She was admitted to the California State Bar in 1997. Ms. Besnard holds the following positions at our wholly owned subsidiaries: (a) director for MFCI, MFC, MFLEX Chengdu, MFM, MKR and MFE and (b) secretary at MFCI.

Lance Jin joined us in May 1995 and since that time has held a variety of positions, including director of business development, telecommunications division manager, program manager and application engineer. In October 2008, Mr. Jin was appointed as our Vice President and Managing Director, Operations, was appointed Executive Vice President and Managing Director of MFLEX China in March 2011 and transitioned to Executive Vice President of Business Development in October 2012. In this role, he is responsible for handling all sales, business development, new customer accounts and program management. Prior to joining MFLEX, Mr. Jin was responsible for business development at the China National Import/Export Corporation. Mr. Jin holds a bachelor’s degree in optical engineering from ZheJiang University in China and a Master’s of Science in Optics and Fine Mechanics from the China Academy of Science. Mr. Jin has also received a Master’s Degree in Business Administration from National University in San Diego.

Foreign and Domestic Operations and Geographic Data

Information regarding financial information about segments and financial data by geographic area is set forth in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6 “Segment Information and Geographic Data.”

Available Information

We file reports with the Securities and Exchange Commission (“SEC”). We make available on our website under “Investor Relations,” free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after we electronically file such materials with or furnish them to the SEC. Our website address is www.mflex.com. Our website address is provided as an inactive textual reference only, and the contents of that website are not incorporated in or otherwise to be regarded as part of this report. You can also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may also obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

 

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Item 1A. Risk Factors

RISK FACTORS THAT MAY AFFECT OUR OPERATING RESULTS

Our business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to those set forth below, any of which could cause our results to be adversely impacted and could result in a decline in the value or loss of an investment in our common stock. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business.

Risks Related to Our Business

We are, and have historically been, heavily dependent upon the smartphone, tablet and consumer electronics industries, and any downturn in these sectors may reduce our net sales.

For the fiscal years ended September 30, 2013, 2012 and 2011, approximately 71%, 69% and 83%, respectively, of our net sales were derived from sales to companies for products or services into our smartphone sector; approximately 21%, 27% and 13%, respectively, of our net sales derived from sales were to companies for products or services into our tablet sector; and approximately 7%, 2% and 1%, respectively, of our net sales were derived from sales to companies for products or services into our consumer electronics sector. In general, these sectors are subject to economic cycles, changes in customer order patterns and periods of slowdown. Intense competition, relatively short product life cycles and significant fluctuations in product demand characterize these sectors, and these sectors are also generally subject to rapid technological change and product obsolescence. Fluctuations in demand for our products as a result of periods of slowdown in these markets (including the current economic downturn) or discontinuation of products or modifications developed in connection with next generation products could reduce our net sales.

We depend on a very limited number of key customers, and a limited number of programs from those customers, for significant portions of our net sales and if we lose business with any of these customers or if the products we are in are not commercially successful, our net sales could decline substantially.

For the past several years, a substantial portion of our net sales has been derived from products that are incorporated into programs manufactured by or on behalf of a very limited number of key customers and their subcontractors, including Apple Inc. and BlackBerry Limited. In addition, a substantial portion of our sales to each customer is often tied to only one program or a small number of programs. In the fiscal years ended September 30, 2013, 2012 and 2011, approximately 75%, 74% and 44%, respectively, of our net sales were to the same one customer. Furthermore, in the fiscal years ended September 30, 2013, 2012 and 2011, approximately 86%, 90% and 86% of our net sales were to the same two customers, and approximately 90%, 94% and 94%, respectively, of our net sales were to only three customers in the aggregate. Our significant customer concentration increases the risk that our business terms with those customers may not be as favorable to us as those we might receive in a more competitive environment. The loss of a major customer or a significant reduction in sales to a major customer, including due to the lack of commercial success by such customer or one or more of its products, a product failure of a customer’s program or limited flex content in a program, would seriously harm our business. Although we are continuing our efforts to reduce dependence on a limited number of customers, net sales attributable to a limited number of customers and their subcontractors are expected to continue to represent a substantial portion of our business for the foreseeable future.

We will have difficulty selling our products if customers do not design flexible printed circuits and assemblies into their product offerings or our customers’ product offerings are not commercially successful.

We sell our flexible printed circuits and assemblies directly or indirectly to OEMs, who include our flexible circuits and component assemblies in their product offerings. We must continue to design our products into our

 

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customers’ product offerings in order to remain competitive. However, our OEM customers may decide not to design flexible printed circuits into their product offerings (or may reduce the amount of flex in a product offering), or may procure flexible printed circuits from one of our competitors. If an OEM selects one of our competitors to provide a product instead of us or switches to alternative technologies developed or manufactured by one or more of our competitors, it becomes significantly more difficult for us to sell our products to that OEM because changing component providers after the initial production runs begin involves significant cost, time, effort and risk for the OEM. Even if an OEM designs one of our products into its product offering, the product may not be commercially successful or may experience product failures, we may not receive any orders from that manufacturer, the OEM may qualify additional vendors for the product or we could be undercut by a competitor’s pricing. Additionally, if an OEM selects one or more of our competitors, they may rely upon such competitors for the life of that specific offering and subsequent generations of similar offerings. Any of these events would result in fewer sales and reduced profits for us, and could adversely affect the accuracy of any forward-looking guidance we may give.

Changes in the products our customers buy from us can significantly affect our capacity, net sales and profitability.

We sell our flexible printed circuits and flex assemblies to a very limited number of customers, who typically purchase these products from us for numerous programs at any particular time. Customer programs differ in design and material content and our products’ prices and profitability are dependent on a wide variety of factors, including without limitation, expected volumes, assumed yields, material costs, actual yields and the amount of third-party components within the program. If we lose sales for a program that has higher material content, we may have to replace it with sales for a program that has lower material content, thus requiring additional capacity to generate the same amount of net sales. We may not have such capacity available (or it may not be economically advantageous to acquire such capacity), which could then result in lower net sales. Furthermore, if we were unable to increase our capacity to match our customers’ requests, we may lose existing business from such customer, in addition to losing future sales. In addition, if we were to utilize our capacity to increase sales of bare flex (flex without assembly), this could also generate lower net sales at potentially different (higher or lower) profitability levels.

Our customers have in the past and likely will continue to cancel their orders, change production quantities, delay production or qualify additional vendors, any of which could reduce our net sales, increase our expenses and/or cause us to write down inventory.

Substantially all of our sales are made on a purchase order basis, and we are not always able to predict with certainty the number of orders we will receive or the timing or magnitude of the orders. Our customers may cancel, change or delay product purchase orders with little or no advance notice to us, and we believe customers are doing so with increased frequency. These changes may be for a variety of reasons, including changes in their prospects, the success of their products in the market, reliance on a new vendor and the overall economic forecast. In general, we do not have long-term contractual relationships with our customers that require them to order minimum quantities of our products, and our customers may decide to use another manufacturer or discontinue ordering from us in their discretion, potentially even after we have begun production on their program. In addition, many of our products are shipped to hubs, and we often have limited visibility and no control as to when our customers pull the inventory from the hub. We have recently seen an increase in the use of hubs by our customers, and our hub balances have been growing. We also have increased risks with respect to inventory control and potential inventory loss, and must rely on third parties for recordkeeping, when our products are shipped to a hub. In addition, whether products are pulled from our hub, or the hub of one of our competitors is not within our control, and the EMS companies who make such decisions may favor one of our competitors over us, particularly if such competitor is affiliated with the EMS company. As a result of these factors, we are not always able to forecast accurately the net sales that we will make in a given period. Changes in orders can also result in layoffs and associated severance costs, which in any given financial period could materially adversely affect our financial results.

 

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In addition, we are increasingly being required to purchase materials, components and equipment before a customer becomes contractually committed to an order so that we may timely deliver the expected order to the customer. We may increase our production capacity, working capital and overhead in expectation of orders that may never be placed, or, if placed, may be delayed, reduced or canceled. As a result, we may be unable to recover costs that we incur in anticipation of orders that are never placed or are cancelled without liability after placed, such as costs associated with purchased raw materials, components or equipment. Delayed, reduced or canceled orders could also result in write-offs of obsolete inventory. Although we estimate inventory reserve amounts, the amount reserved may not be sufficient for such write-offs. In addition, we may underutilize our manufacturing capacity if we decline other orders because we expect to use our capacity for orders that are later delayed, reduced or canceled.

Our industry is extremely competitive, and if we are unable to respond to competitive pressures we may lose sales and our market share could decline.

We compete primarily with large flexible printed circuit board manufacturers located throughout Asia, including Taiwan, China, Korea, Japan and Singapore. We believe that the number of companies producing flexible printed circuit boards has increased materially in recent years and may continue to increase. In addition, certain former competitors are in the process of re-instituting their flexible printed circuit production which will increase competition in our market. Certain EMS providers have developed or acquired their own flexible printed circuit manufacturing capabilities or have extensive experience in electronics assembly, and in the future may cease ordering products from us or even compete with us on OEM programs. In addition, the number of customers in the market has been decreasing through consolidation and otherwise and the smartphone and tablet markets continue to become more competitive in terms of pricing. Furthermore, many companies in our target customer base may move the design and manufacturing of their products to original design manufacturers in Asia. These factors, among others, make our industry extremely competitive. If we are not successful in addressing these competitive aspects of our business, we may not be able to grow or maintain our market share, net sales, or profitability.

Our products and their terms of sale are subject to various pressures from our customers, competitors and market forces, any of which could harm our gross profits.

Our selling prices are affected by changes in overall demand for our products, changes in the specific products our customers buy, pricing of competitors’ products, our manufacturing efficiency, our products’ life cycles and general economic conditions. In addition, from time to time we may elect to reduce the price of certain products we produce in order to gain additional orders on a particular program. A typical life cycle for one of our products has our selling price decrease as the program matures. To offset price decreases during a product’s life cycle, we rely primarily on higher sales volume and improving our manufacturing yield and productivity to reduce a product’s cost. If we cannot reduce our manufacturing costs as prices decline during a product’s life cycle, or if we are required to pay damages to a customer due to a breach of contract or other claim, including due to quality or delivery issues, our cost of sales as a percentage of net sales may increase, which would harm our profitability and could affect our working capital levels.

In addition, our key customers and their subcontractors are able to exert significant pricing pressure on us and often require us to renegotiate the terms of our arrangements with them, including increasing or removing liability and indemnification thresholds and increasing the length of payment terms, among other terms. Increases in our labor costs, especially in China where we may have little or no advance notice of such increases, changes in contract terms and regular price reductions have historically resulted in lower gross margins for us and may continue to do so in future periods. Furthermore, our competitive position is dependent upon the yields and quality we are able to achieve on our products and our level of automation as compared to our competitors. We believe our competitors have been rapidly investing in more efficient and higher capability processes and automation, and if we do not match such investments, this could negatively impact our ability to compete on price, technology and capability. These trends and factors may harm our business and make it more difficult to compete effectively, and grow or maintain our net sales and profitability.

 

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Significant product failures or safety concerns about our or our customers’ products could harm our reputation and our business.

Continued improvement in manufacturing capabilities, quality control, material costs and successful product testing capabilities are critical to our growth. Our efforts to monitor, develop, modify and implement stringent testing and manufacturing processes for our products may not be sufficient. If any flaw in the design, production, assembly or testing of our or our customers’ products were to occur or if our, or our customers’ products were believed to be unsafe, it could result in significant delays in product shipments by, or cancellation of orders or, substantial penalties from, our customers and their customers, substantial refund, recall, repair or replacement costs, an increased return rate for our products, potential damage to our reputation, or potential lawsuits which could prove to be time consuming and costly. Pronouncements by the World Health Organization listing mobile phone use as possibly carcinogenic may affect our customers’ sales and in turn affect our sales to our customers. Because we normally provide a warranty for our products, a significant claim for damages related to a breach of warranty could materially affect our financial results.

Problems with manufacturing yields and/or our inability to ramp up production could impair our ability to meet customer demand for our products.

We could experience low manufacturing yields due to, among other things, design errors, manufacturing failures in new or existing products, the inexperience of new employees, component defects, or the learning curve experienced during the initial and ramp up stages of new product introduction. If we cannot achieve expected yields in the manufacture of our products, this could result in higher operating costs, which could result in higher per unit costs, reduced product availability and may subject us to substantial penalties by our customers. Reduced yields or an inability to successfully ramp up products can significantly harm our gross margins, resulting in lower profitability or even losses. In addition, if we were unable to ramp up our production in order to meet customer demand, whether due to yield or other issues, it would impair our ability to meet customer demand for our products, which could cause us to lose an order for such product, or lose the customer altogether, and our net sales and profitability would be negatively affected.

We must develop and adopt new technology and manufacture new products and product features in order to remain competitive, and we may not be able to do so successfully.

Our long-term strategy relies in part on timely adopting, developing and manufacturing technological advances and new products and product features to meet our customers’ needs and to expand into new markets outside the mobility market. However, any new technology and products adopted or developed by us may not be selected by existing or potential customers, or customers outside the mobility market may not select either our current or new products for their offerings. Customers could decide to switch to alternative technologies or materials, adopt new or competing industry standards with which our products are incompatible or fail to adopt standards with which our products are compatible. If we choose to focus on new technology or a standard that is ultimately not accepted by the industry and/or does not become the industry standard, we may be unable to sell those products. If we are unable to obtain customer qualifications for new products or product features, cannot qualify our products for high-volume production quantities or do not execute our operational and strategic plans for new products, markets or advanced technologies in a timely manner, our net sales may decrease. In addition, we may incur higher manufacturing costs in connection with new technology, materials, products or product features, as we may be required to replace, modify, design, build and install equipment, all of which would require additional capital expenditures.

We must continue to be able to procure raw materials and components on commercially reasonable terms to manufacture our products profitably.

Generally we do not maintain a large surplus stock of raw materials or components for our products because the specific assemblies are uniquely applicable to the products we produce for our customers; therefore, we rely on third-party suppliers to provide these raw materials and components in a timely fashion and on commercially

 

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reasonable terms. In addition, we are often required by our customers to seek components from a limited number of suppliers that have been pre-qualified by the customer. We, or our customers, may not be able to obtain the components or flex materials that are required for our customers’ programs, which in turn could forestall, delay, or halt our production or our customers’ programs. We expect that delays may occur in future periods for a variety of reasons, including but not limited to, natural disasters. Furthermore, the supply of certain precious metals required for our products is limited, and our suppliers could lose their export or import licenses on materials we require, any of which could limit or halt our ability to manufacture our products. We may not be successful in managing any shortage of raw materials or components that we may experience in the future, which could adversely affect our relationships with our customers and result in a decrease in our net sales. Component shortages could also increase our cost of goods sold because we may be required to pay higher prices for components in short supply. In addition, suppliers could go out of business, discontinue the supply of key materials, or consider us too small of a customer to sell to directly, and could require us to buy through distributors, increasing the cost of such components to us.

Our manufacturing and shipping costs may also be impacted by fluctuations in the cost of oil and gas. Any fluctuations in the supply or prices of these commodities could have an adverse effect on our profit margins and financial condition.

If we are unable to attract or retain personnel necessary to operate our business, our ability to develop and market our products successfully could be harmed.

We believe that our success is highly dependent on our current executive officers and management team. We do not have an employment contract with Reza Meshgin, our president and chief executive officer, or any of our other key personnel, and their knowledge of our business and industry would be extremely difficult to replace. The loss of any key employee or the inability to attract or retain qualified personnel, including engineers, sales and marketing personnel, management or finance personnel could delay the development and introduction of our products, harm our reputation or otherwise damage our business.

Furthermore, we have experienced very high employee turnover in our facilities in China, and we are experiencing increased difficulty in recruiting employees for these facilities. In addition, we are noting the signs of wage inflation, labor unrest and increased unionization in China and expect these to be ongoing trends for the foreseeable future, which could cause employee issues, including work stoppages, excessive wage increases and increased activity of labor unions, at our China facilities. A large number of our employees works in our facilities in China, and our costs associated with hiring and retaining these employees have increased over the past several years. The high turnover rate, increasing wages, our difficulty in recruiting and retaining qualified employees and the other labor trends we are noting in China have resulted in an increase in our employee expenses, and a continuation of any of these trends could result in even higher costs or production disruptions or delays or the inability to ramp up production to meet increased customer orders, resulting in order cancellation, imposition of customer penalties if we were unable to timely deliver product or a negative impact on net sales and profits for us.

Our manufacturing capacity may be interrupted, limited or delayed if we cannot maintain sufficient utility sources in China.

The flexible printed circuit fabrication process requires a stable utility source. As our production capabilities increase in China and our business grows, our requirements for a stable source of electricity, gas and steam in China will grow substantially. We have periodically experienced and expect to continue to experience insufficient supplies of electrical power from time to time, especially during the warmer summer months in China. In addition, China has instituted energy conservation regulations which ration the amount of electricity that may be used by enterprises such as ours. Although we have purchased several generators, such generators do not produce sufficient electricity supply to run our manufacturing facilities and they are costly to operate. Power interruptions, electricity shortages, the cost of diesel fuel to run our back-up generators or government intervention, particularly in the form of rationing, are factors that could restrict our access to electricity at our

 

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Chinese manufacturing facilities. Any such insufficient access to electricity, gas, steam or other utility could affect our ability to manufacture and related costs. Any such shortages could result in delays in our shipments to our customers and, potentially, the loss of customer orders and penalties from such customers for the delay.

Our global operations expose us to additional risk and uncertainties.

We have operations in a number of countries, including the United States, China, Korea, Taiwan, the United Kingdom and Singapore. Our global operations may be subject to risks that may limit our ability to operate our business. We manufacture the bulk of our products in China and sell our products globally, which exposes us to a number of risks that can arise from international trade transactions, local business practices and cultural considerations, including:

 

   

political unrest, terrorism and economic or financial instability;

 

   

restrictions on our ability to repatriate earnings;

 

   

unexpected changes in regulatory requirements and uncertainty related to developing legal and regulatory systems related to economic and business activities, real property ownership and application of contract rights;

 

   

nationalization programs that may be implemented by foreign governments;

 

   

import-export regulations;

 

   

difficulties in enforcing agreements and collecting receivables;

 

   

difficulties in ensuring compliance with the laws and regulations of multiple jurisdictions, including complying with local employment and overtime regulations, which regulations could affect our ability to quickly ramp production;

 

   

difficulties in ensuring that health, safety, environmental and other working conditions are properly implemented and/or maintained by the local office;

 

   

changes in labor practices, including wage inflation, frequent and extremely high increases in the minimum wage, labor unrest and unionization policies;

 

   

limited intellectual property protection;

 

   

longer payment cycles by international customers;

 

   

currency exchange fluctuations;

 

   

inadequate local infrastructure and disruptions of service from utilities or telecommunications providers, including electricity shortages;

 

   

transportation delays and difficulties in managing international distribution channels;

 

   

difficulties in staffing foreign subsidiaries and in managing an expatriate workforce;

 

   

potentially adverse tax consequences;

 

   

differing employment practices and labor issues;

 

   

the occurrence of natural disasters, such as earthquakes, floods or other acts of force majeure; and

 

   

public health emergencies such as SARS, avian flu and Swine flu.

We also face risks associated with currency exchange and convertibility, inflation and repatriation of earnings as a result of our foreign operations. In some countries, economic, monetary and regulatory factors could affect our ability to convert funds to U.S. dollars or move funds from accounts in these countries. We are also vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. Although we have significant operations in Asia, a substantial portion of transactions are denominated in U.S. dollars, including

 

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approximately 96% of the total shipments made to foreign manufacturers during the fiscal year 2013. The balance of our net sales is denominated in Chinese Renminbi (“RMB”). As a result, as appreciation against the U.S. dollar increases, it will result in an increase in the cost of our business expenses in China. Further, downward fluctuations in the value of foreign currencies relative to the U.S. dollar may make our products less price competitive than local solutions. From time to time, we may engage in currency hedging activities, but such activities may not be able to limit the impact or risks of currency fluctuations.

In addition, our activities in China are subject to administrative review and approval by various national and local agencies of China’s government. Given the changes occurring in China’s legal and regulatory structure, we may not be able to secure required governmental approval for our activities or facilities, or the government may not apply real property or contract rights in the same manner as one may expect in other jurisdictions.

From time to time, we increase and decrease our manufacturing capacity, and we may have difficulty managing these changes.

From time to time, we engage in a number of manufacturing expansion and contraction projects, based on the then-current and forecasted needs of our business. In addition, from time to time, we are engaged in international restructuring efforts in order to better align our business functions with our international operations and to transition certain production and process research and development to China or other lower cost locations in continuation of our cost reduction efforts. These efforts can require significant investment by us, and have in the past and could continue to result in increased expenses, inefficiencies and reduced gross margins.

Our management team may have difficulty managing our manufacturing capacity and transition projects or otherwise managing any growth or downsizing in our business that we may experience. Risks associated with right-sizing our manufacturing capacity may include those related to:

 

   

managing multiple, concurrent capacity expansion or reduction projects;

 

   

managing the reduction of employee headcount for facilities where we reduce or cease our activities;

 

   

accurately predicting any increases or decreases in demand for our products and managing our manufacturing capacity appropriately;

 

   

under-utilized capacity, particularly during the start-up phase of a new manufacturing facility and the effects on our gross margin of under-utilization;

 

   

managing increased employment costs and scrap rates often associated with periods of growth or contraction;

 

   

implementing, integrating and improving operational and financial systems, procedures and controls, including our computer systems;

 

   

construction delays, equipment delays or shortages, labor shortages and disputes and production start-up problems; and

 

   

cost overruns and charges related to our expansion or contraction of activities.

Our management team may not be effective in expanding or reducing our manufacturing facilities, and our systems, procedures and controls may not be adequate to support such changes in manufacturing capacity. Any inability to manage changes in our manufacturing capacity may harm our profitability and growth.

If we encounter problems during the expansion and continuing expanded use of our operations management and information systems, we could experience a disruption of our operations and unanticipated increases in our costs.

We are in the process of expanding our information systems for certain of our China facilities. Any problems encountered in the expansion of these systems and continued use and reliance on such systems could

 

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result in material adverse consequences, including disruption of operations, loss of information and unanticipated increases in costs.

United Engineers Limited is deemed to have an indirect beneficial ownership in approximately 62% of our outstanding common stock and is able to exert influence over us and our major corporate decisions.

United Engineers Limited (“UEL”) through its subsidiaries (which include WBL Corporation Limited (“WBL”) as result of UEL’s recent stock acquisition of WBL) (collectively “UE Group”) is deemed to indirectly beneficially own the outstanding common stock in our Company which is beneficially owned by WBL, representing approximately 62% of such outstanding common stock. As a result, UE Group has influence over the composition of our board of directors and our management, operations and potential significant corporate actions. The board or executive management composition of UEL and/or WBL could change, and such change could affect the strategic direction of UEL and/or WBL and the way UEL and/or WBL influence our corporate actions. For example, so long as the UE Group continues to control more than a majority of our outstanding common stock, it will have the ability to control who is elected to our board of directors each year. Furthermore, the strategic direction of UEL and/or WBL may influence how, when and if the WBL Entities (defined below) elect to sell its stock in us under the Registration Statement on Form S-3 that has been filed by the Company to cover such sales.

In addition, for so long as WBL or its subsidiaries (collectively, the “WBL Entities”) effectively own at least one-third of our voting stock, it has the ability, through a stockholders’ agreement with us, to approve the appointment of any chief executive officer or the issuance of securities that would reduce the WBL Entities’ effective ownership of us to a level that is below a majority of our outstanding shares of common stock, as determined on a fully diluted basis. As a result, UEL and/or WBL could preclude us from engaging in an acquisition or other strategic opportunity that we may want to pursue if such acquisition or opportunity require the issuance of our common stock. This concentration of ownership may also discourage, delay or prevent a change of control of our company, which could deprive our other stockholders of an opportunity to receive a premium for their stock as part of a sale of our company, could harm the market price of our common stock and could impede the growth of our company. The UE Group could also sell a controlling interest in us, or a portion of their interest, to a third party, including a participant in our industry, which could adversely affect our operations or our stock price.

The UE Group and its representatives on our board of directors may have interests that conflict with, or are different from, the interests of our other stockholders. These conflicts of interest could include potential competitive business activities, corporate opportunities, indemnity arrangements, debt covenants, sales or distributions by the UE Group of our common stock and the exercise by the UE Group of its ability to influence our management and affairs. In general, our certificate of incorporation does not contain any provision that is designed to facilitate resolution of actual or potential conflicts of interest. If any conflict of interest is not resolved in a manner favorable to our stockholders, it could adversely affect our operations and our stockholders’ interests may be substantially harmed.

WBL is currently unable to vote its shares on certain matters that require stockholder approval without obtaining approval from the stockholders of WBL (and if applicable, UEL) and/or regulatory approval and it is possible that such stockholders or the relevant regulators may not approve the proposed corporate action.

Both WBL’s and UEL’s ordinary shares are listed on the Singapore Securities Exchange Trading Limited (the “Singapore Exchange”). Under the rules of the Singapore Exchange, when we submit a matter for the approval of our stockholders, WBL (and if applicable, UEL) may be required to obtain the approval of its own respective stockholders for such action before WBL can vote its shares with respect to our proposal or dispose of our shares of common stock. Examples of corporate actions we may seek to take that may require WBL (and if applicable, UEL) to obtain its stockholders’ approval may include certain amendments of our certificate of

 

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incorporation, an acquisition or a sale of our assets the value of which exceeds certain prescribed thresholds under the rules of the Singapore Exchange, and certain issuances of our capital stock.

To obtain stockholder approval, WBL (and if applicable, UEL) must prepare a circular describing the proposal, submit it to the Singapore Exchange for review and send the circular to its stockholders, which may take several weeks or longer. In addition, WBL and UEL are each required under its corporate rules to give its stockholders advance notice of the meeting. Consequently, if we need to obtain our stockholders’ approval for a matter which also requires the approval of the stockholders of WBL (and if applicable, UEL), the process of seeking stockholder approval from WBL (and if applicable, UEL) may delay our proposed action and it is possible that the stockholders of WBL (or if applicable, UEL) may not approve our proposed corporate action. It is also possible that we might not be able to establish a quorum at our stockholder meeting if WBL was unable to vote at the meeting if the approval of the stockholders of WBL (and if applicable, UEL) is not obtained. The rules of the Singapore Exchange that govern WBL and UEL are subject to revision from time to time, and policy considerations may affect rule interpretation and application. It is possible that any change to or interpretation of existing or future rules may be more restrictive and complex than the existing rules and interpretations.

Our business requires significant investments in capital equipment, facilities and technological improvements, and we may not be able to obtain sufficient funds to make such capital expenditures.

To remain competitive we must continue to make significant investments in capital equipment, facilities and technological improvements. We expect that substantial capital will be required to expand our manufacturing capacity and fund working capital requirements for our anticipated growth. In addition, we expect that new technology requirements may increase the capital intensity of our business. We may need to raise additional funds through further debt or equity financings in order to fund our anticipated growth and capital expenditures, and we may not be able to raise additional capital on reasonable terms, or at all, particularly given the current uncertainty in global credit markets. If we are unable to obtain sufficient capital in the future, we may have to curtail our capital expenditures. Any curtailment of our capital expenditures could result in a reduction in net sales, reduced quality of our products, increased manufacturing costs for our products, harm to our reputation, reduced manufacturing efficiencies or other harm to our business. Furthermore, our board has authorized a stock repurchase program, and may authorize additional stock repurchases in the future, and the funds we expend for any such repurchase may later be needed for the operation of our business.

In addition, under our stockholder agreement with the WBL Entities, approval from a “WBL Director” on our board (as defined in such agreement) is required for the issuance of securities that would reduce its effective ownership of us to below a majority of the outstanding shares of our common stock as determined on a fully diluted basis. If such approval is required for a proposed financing, it is possible that we may not be able to obtain the approval for the financing and we may not be able to complete the transaction, which could make it more difficult to obtain sufficient funds to operate and expand our business.

The uncertainty regarding the status of the global credit market and overall global economic stagnation may adversely affect our earnings, liquidity and financial condition.

In recent years, global financial and credit markets have been, and continue to be, unstable and unpredictable. In addition, worldwide economic conditions have been weak and have had an effect on consumer spending. The instability of the markets and weakness of the economy could affect the demand for our customers’ products, the amount, timing and stability of their orders to us, the financial strength of our customers and suppliers, their ability or willingness to do business with us, our willingness to do business with them, interest rates, and/or our suppliers’ and customers’ ability to fulfill their obligations to us. These factors could adversely affect our operations, earnings and financial condition.

 

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Tax positions we have taken may be challenged and we are subject to the risk of changing income tax rates and laws.

From time to time, we may be subject to various types of tax audits, during which tax positions we have taken may be challenged and overturned. If this were to occur, our tax rates could significantly increase and we may be required to pay significant back taxes, interests and/or penalties. The outcome of tax audits cannot be predicted with certainty. If any issues addressed in our tax audits are resolved in a manner not consistent with management’s expectations, we could be required to adjust our provision for income tax in the period such resolution occurs. Any significant proposed adjustments could have a material adverse effect on our results of operations, cash flows and financial position if not resolved favorably.

In addition, a change in tax laws, treaties or regulations, or their interpretation, of any country in which we operate could result in a higher tax rate. For example, there has been increased scrutiny by the U.S. government on tax positions taken, and during April 2013, the United States Department of the Treasury issued a high-level outline of proposed modifications to international tax laws for fiscal year 2014. If any of these, or similar, proposals are passed, our statements of financial position and results of operations could be negatively impacted.

Also, a number of countries in which we are located allow for tax holidays or provide other tax incentives to attract and retain business. For example, we currently enjoy tax incentives and holidays for certain of our facilities in Asia. However, any tax holiday or incentive we have could be challenged, modified or even eliminated by taxing authorities or changes in law. In addition, the tax laws and rates in certain jurisdictions in which we operate (China, for example) can change with little or no notice, and any such change may even apply retroactively. Any of such changes could adversely affect our effective tax rate.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position and harm our business.

We rely primarily on trade secrets and confidentiality procedures relating to our manufacturing processes to protect our proprietary rights. Despite our efforts, these measures can only provide limited protection. Unauthorized third parties may try to copy or reverse engineer portions of our products or otherwise obtain and use our intellectual property. If we fail to protect our proprietary rights adequately, our competitors could offer similar products using processes or technologies developed by us, potentially harming our competitive position. In addition, other parties may independently develop similar or competing technologies.

We also rely on patent protection for some of our intellectual property. Our patents may be expensive to obtain and there is no guarantee that either our current or future patents will provide us with any competitive advantages. A third party may challenge the validity of our patents, or circumvent our patents by developing competing products based on technology that does not infringe our patents. Further, patent protection is not available at all in certain countries and some countries that do allow registration of patents do not provide meaningful redress for patent violations. As a result, protecting intellectual property in those countries is difficult, and competitors could sell products in those countries that have functions and features that would otherwise infringe on our intellectual property. If we fail to protect our intellectual property rights adequately, our competitors may gain access to our technology and our business may be harmed.

We may be sued by third parties for alleged infringement of their proprietary rights.

From time to time, we have received, and expect to continue to receive, notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights. We could also be subject to claims arising from the allocation of intellectual property rights among us and our customers. Any claims brought against us or our customers, with or without merit, could be time-consuming and expensive to litigate or settle, and could divert management attention away from our business plan. Adverse determinations in litigation could subject us to significant liability and could result in the loss of our proprietary rights. A successful lawsuit against us could also force us to cease selling or require us to redesign any products or marks that incorporate the infringed

 

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intellectual property. In addition, we could be required to seek a license from the holder of the intellectual property to use the infringed technology, and it is possible that we may not be able to obtain a license on reasonable terms, or at all. If we fail to develop a non-infringing technology on a timely basis or to license the infringed technology on acceptable terms, our business, financial condition and results of operations could be harmed.

Complying with environmental laws and regulations or the environmental policies of our customers may increase our costs and reduce our profitability.

We are subject to a variety of environmental laws and regulations relating to the storage, discharge, handling, emission, generation, manufacture, use and disposal of chemicals, solid and hazardous waste and other toxic and hazardous materials used in the manufacture of flexible printed circuits and component assemblies in our facilities in the United States, Europe and Asia. In addition, certain of our customers have, or may in the future, have environmental policies with which we are required to comply that are more stringent than applicable laws and regulations. A significant portion of our manufacturing operations are located in China, where we are subject to constantly evolving environmental regulation. The costs of complying with any change in, or interpretation of, such regulations or customer policies and the costs of remedying potential violations or resolving enforcement actions that might be initiated by governmental entities could be substantial.

We have recently been notified that one of our facilities in Suzhou, China has a permit for only one wet process line. While the amount of discharge we release is within our permitted amount for such facility, we operate multiple wet process lines at such facility. We are currently working with the appropriate officials and regulatory bodies in China to resolve this issue. However, we cannot predict the nature, scope or effect of penalties that could be imposed for this issue, or for any other potential issue, and we could in this case, or in the future, be required to halt one or more segments of our operations or be fined. The costs of remedying violations or resolving enforcement actions that might be initiated by governmental authorities could be substantial. Any remediation of environmental contamination would involve substantial expense that could harm our results of operations. In addition, we cannot predict the nature, scope or effect of future regulatory or customer requirements to which our operations may be subject or the manner in which existing or future laws or customer policies will be administered or interpreted. Future regulations may be applied to materials, products or activities that have not been subject to regulation previously. The costs of complying with new or more stringent regulations or policies could be significant.

Compliance with new regulations and customer demands regarding “conflict minerals” could significantly increase costs and affect the manufacturing and sale of our products.

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2012 (the Dodd-Frank Act) required the SEC to establish new disclosure and reporting requirements regarding specified minerals originating in the Democratic Republic of the Congo or an adjoining country that are necessary to the functionality or production of products manufactured by companies required to file reports with the SEC. The SEC has recently adopted disclosure rules for companies that use conflict minerals in their products, with substantial supply chain verification requirements in the event that the materials come from, or could have come from such areas. The final rules implementing these requirements could affect sourcing at competitive prices and availability in sufficient quantities of minerals used in the manufacture of our products. In addition, there are costs associated with complying with the disclosure requirements, such as costs related to determining the source of such minerals used in our products. Also, because our supply chain is complex, we may face commercial challenges if we are unable to sufficiently verify the origins for all metals used in our products through the due diligence procedures that we implement and otherwise may become obliged to publicly disclose those efforts with regard to conflict minerals. Moreover, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict free which could place us at a competitive disadvantage if we are unable to do so.

 

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Potential future acquisitions or strategic partnerships or business alliances could be difficult to integrate, divert the attention of key management personnel, disrupt our business, dilute stockholder value and adversely affect our financial results.

As part of our business strategy, we intend to continue to consider acquisitions of, or partnerships or business alliances with, companies, technologies and products that we feel could enhance our capabilities, complement our current products or expand the breadth of our markets or customer base. We have limited experience in acquiring or partnering with other businesses and technologies. Potential and completed acquisitions and strategic alliances involve numerous risks, including:

 

   

difficulties in integrating operations, technologies, accounting and personnel;

 

   

problems maintaining uniform standards, procedures, controls and policies;

 

   

difficulties in supporting and transitioning customers of our acquired companies;

 

   

diversion of financial and management resources from existing operations;

 

   

potential costs incurred in executing on such a transaction, including any necessary debt or equity financing;

 

   

risks associated with entering new markets in which we have no or limited prior experience;

 

   

potential loss of key employees; and

 

   

inability to generate sufficient revenues to offset acquisition or start-up costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing convertible debt or equity securities, our existing stockholders may be diluted, which could affect the market price of our stock. As a result, if we fail to properly evaluate acquisitions or partnerships, we may not achieve the anticipated benefits of any such acquisitions or partnerships, and we may incur costs in excess of what we anticipate.

We face potential risks associated with loss, theft or damage of our property or property of our customers.

Some of our customers have entrusted us with proprietary equipment or intellectual property to be used in the design, manufacture and testing of the products we make for them. In some instances, we face potentially millions of dollars in financial exposure to those customers if such equipment or intellectual property is lost, damaged or stolen. Although we take precautions against such loss, theft or damage and we may insure against a portion of these risks, such insurance is expensive, may not be applicable to any loss we may experience and, even if applicable, may not be sufficient to cover any such loss. Further, deductibles for such insurance may be substantial and may adversely affect our operations if we were to experience a loss, even if insured.

Litigation may distract us from operating our business.

Litigation that may be brought by or against us could cause us to incur significant expenditures and distract our management from the operations and conduct of our business. Furthermore, there can be no assurance that we would prevail in such litigation or resolve such litigation on terms favorable to us, which may adversely affect our operations.

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results.

Effective internal controls are necessary for us to provide reliable financial reports. This effort is made more challenging by our significant overseas operations. If we cannot provide reliable financial reports, our operating results could be misstated, current and potential stockholders could lose confidence in our financial reporting and

 

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the trading price of our stock could be negatively affected. There can be no assurance that our internal controls over financial processes and reporting will be effective in the future.

Risks Related to Our Common Stock

Sales of our common stock by our majority stockholder could depress the price of our common stock or weaken market confidence in our prospects.

Pursuant to a Registration Rights Agreement between us and the WBL Entities, we have filed a Registration Statement on Form S-3, covering the re-sale of all 14,817,052 of our shares held by the WBL Entities. The WBL Entities may sell all or part of the shares of our common stock that it owns (or distribute those shares to its shareholders). A large influx of shares of our common stock into the market as a result of such sales, or the mere perception that these sales could occur, could cause the market price of our common stock to decline, perhaps substantially, and may weaken market confidence in us or our prospects, which could have an adverse effect on our financial condition, results of operation or stock price. If there is a disposal by the WBL Entities of their shares of our common stock with value that exceeds certain prescribed thresholds and constitutes a major transaction under the rules of the Singapore Exchange, then such disposal would require the approval of the stockholders of WBL (and if applicable, UEL). The WBL Entities may be able to sell part of their shares of our common stock without requiring such stockholders’ approval if such thresholds are not met; however, even such sale could impact the market price of our common stock. Further, these sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

The trading price of our common stock is volatile.

The trading prices of the securities of technology companies, including the trading price of our common stock, have historically been highly volatile. During the twelve-month period from October 1, 2012 through September 30, 2013, our common stock price closed between $14.02 and $22.91 per share. Factors that could affect the trading price of our common stock include, but are not limited to:

 

   

fluctuations in our financial results;

 

   

the limited size of our public float;

 

   

announcements of technological innovations or events affecting companies in our industry;

 

   

changes in the estimates of our financial results;

 

   

changes in the recommendations of any securities analysts that elect to follow our common stock; and

 

   

market conditions in our industry, the industries of our customers and the economy as a whole.

In addition, although we have approximately 24.1 million shares of common stock outstanding as of September 30, 2013, approximately 14.8 million of those shares are held by the WBL entities. As a result, there is a limited public float in our common stock. If any of our significant stockholders were to decide to sell a substantial portion of its shares the trading price of our common stock could decline. See “Risk Factors—Sales of our common stock by our majority stockholder could depress the price of our common stock or weaken market confidence in our prospects” for more information.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management including, among other things, provisions providing for a classified board of directors, authorizing the board of directors to issue preferred stock and the elimination of

 

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stockholder voting by written consent. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which may discourage, delay or prevent certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These provisions in our charter, bylaws and under Delaware law could discourage delay or prevent potential takeover attempts that stockholders may consider favorable.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

The following is a summary of our material properties at September 30, 2013:

 

Entity/function

  Location   Square Feet (Building)   Lease Expiration Dates
Multi-Fineline Electronix, Inc.—Executive offices, research and development   Irvine, California   Leased—20,171   April 2015
MFLEX UK Limited—Engineering and research and development of segmented electroluminescent printed displays and SmartInk® technologies   Cambridge, United

Kingdom

  Leased—8,075   April 2015
MFLEX Suzhou Co., Ltd.—Engineering, circuit fabrication and assembly (Nanhu Road)   Suzhou, China   Owned—566,108   2053*
    Leased—149,726   May 2014
MFLEX Suzhou Co., Ltd.—Circuit fabrication (Shanfeng Road)   Suzhou, China   Owned—594,254   2058*
MFLEX Suzhou Co., Ltd.—Circuit assembly   Puzhuang, China   Owned—127,036   2052*
MFLEX Chengdu Co., Ltd.—Circuit assembly   Chengdu, China   Owned—322,132   2059*
Multi-Fineline Electronix Singapore Pte. Ltd.— Regional office   Singapore   Leased—12,000   December 2015
MFLEX Korea, Ltd.—Regional office   Seoul, Korea   Leased—1,427   July 2014

 

* We have several parcels that have land use rights expiring in 2052 and beyond. Under the terms of these land use rights, we paid an upfront fee for use of the parcel through expiration. We have no other financial obligations on these land use rights other than payments of real estate taxes.

We believe our facilities are adequate for our current needs and that suitable additional or substitute space will be available to accommodate foreseeable expansion of our operations or to move our operations in the event one or more of our short-term leases can no longer be renewed on commercially reasonable terms at the expiration of its term.

 

Item 3. Legal Proceedings

From time to time, we may be party to lawsuits in the ordinary course of business. We are currently not a party to any material legal proceedings.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

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Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Stock

Our common stock, par value $0.0001, is traded on the NASDAQ Global Select Market (“Nasdaq”) under the symbol “MFLX.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock on Nasdaq, as reported in its consolidated transaction reporting system:

 

     Fiscal 2013      Fiscal 2012  
     High      Low      High      Low  

First quarter

   $ 23.10       $ 15.12       $ 24.18       $ 18.34   

Second quarter

   $ 22.88       $ 14.24       $ 28.70       $ 20.22   

Third quarter

   $ 16.22       $ 13.89       $ 27.57       $ 23.15   

Fourth quarter

   $ 17.43       $ 14.55       $ 29.70       $ 22.02   

Issuer Purchases of Equity Securities

Our Board of Directors has provided a committee with the discretion to execute a share repurchase program for up to 1,100,000 shares in the aggregate of our common stock on the open market. These shares represented approximately five percent of our common stock outstanding as of September 30, 2013.

The following table shows a summary of shares repurchased as of September 30, 2013 for each of our 105b-1 Repurchase Plan Agreements under the share repurchase program:

 

Date Entered

   Expiry Date    Maximum
Shares
     Shares
Repurchased
     Weighted-Average
Purchase Price
Per Share
     Total Value
of Shares
Repurchased
(in thousands)
 

May 3, 2013

   August 13, 2013      535,406         43,782       $ 14.75       $ 646   

December 3, 2012

   December 31, 2012      200,000         76,194       $ 18.95       $ 1,444   

September 2, 2011

   June 2, 2012      500,000         488,400       $ 20.17       $ 9,853   

The repurchased shares were retired and the excess of the repurchase price over par value was booked as an adjustment to additional paid-in capital in the fiscal years in which the respective shares were retired.

The following table presents stock repurchases by month during fiscal 2013:

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares that May
Yet be Purchased
Under the Plans or
Programs
 

12/01/2012 – 12/31/2012

     65,496       $ 18.81         65,496         546,104   

01/01/2013 – 01/31/2013

     10,698       $ 19.78         10,698         535,406   

06/01/2013 – 06/30/2013

     11,708       $ 14.77         11,708         523,698   

07/01/2013 – 07/31/2013

     23,746       $ 14.66         23,746         499,952   

08/01/2013 – 08/31/2013

     8,328       $ 15.00         8,328         491,624   
  

 

 

       

 

 

    

Total

     119,976       $ 17.42         119,976      
  

 

 

       

 

 

    

During the fiscal year ended September 30, 2013, a total of 119,976 shares were repurchased at a weighted-average purchase price of $17.42 per share for a total value of $2.1 million.

 

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Holders of Record

Stockholders of record on September 30, 2013 totaled approximately 18. Because many of the shares of our common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners represented by these stockholders of record.

Dividends

We have never declared or paid any cash dividend on our common stock, nor do we currently intend to pay any cash dividend on our common stock in the foreseeable future. We currently expect to retain our earnings, if any, for the growth and development of our business.

Stock Performance Graph

The following graph shows the cumulative total stockholder return (change in stock price plus reinvested dividends) assuming the investment of $100 on September 30, 2008 in each of our common stock, the NASDAQ Index and the NASDAQ Electronic Components Index. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock. This Stock Price Performance Graph is not deemed to be “soliciting material” or “filed” with the SEC under the Securities Exchange Act of 1934, and is not incorporated by reference in any past or future filing by us under the Securities Exchange Act of 1934 or the Securities Act of 1933, unless it is specifically referenced.

 

LOGO

Securities Authorized for Issuance Under Equity Compensation Plans

Information regarding the securities authorized for issuance under our equity compensation plans can be found under Item 12 of this Annual Report.

 

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Item 6. Selected Financial Data

The following selected financial data is qualified by reference to, and should be read in conjunction with, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part II, Item 7 of this Annual Report and the Consolidated Financial Statements and related notes included in Part II, Item 8 of this Annual Report. The selected consolidated statements of income data for the fiscal years ended September 30, 2013, 2012 and 2011 and selected consolidated balance sheet data as of September 30, 2013 and 2012 are derived from audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statements of income data for the fiscal years ended September 30, 2010 and 2009 and selected consolidated balance sheet data as of September 30, 2011, 2010 and 2009 were derived from audited consolidated financial statements not included in this Annual Report. Our historical results are not necessarily indicative of our future results.

 

     Fiscal Years Ended September 30,  
     2013     2012     2011     2010     2009  
     (in thousands, except shares, per share data and ratios)  

Consolidated Statements of Income Data:

          

Net sales

   $ 787,644      $ 818,932      $ 831,561      $ 791,339      $ 764,432   

Cost of sales

     788,774        736,241        726,850        678,294        653,568   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (1,130     82,691        104,711        113,045        110,864   

Operating expenses:

          

Research and development

     7,776        7,615        10,485        14,455        5,505   

Sales and marketing

     22,720        24,457        25,189        24,086        22,146   

General and administrative

     17,118        19,839        18,788        21,625        25,486   

Stock-based compensation expense resulting from change in control

     9,582        —         —         —         —    

Impairment and restructuring

     7,537        (2,468     4,186        11,376        328   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     64,733        49,443        58,648        71,542        53,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (65,863     33,248        46,063        41,503        57,399   

Other income (expense), net:

          

Interest income

     727        1,352        875        535        767   

Interest expense

     (487     (555     (472     (782     (768

Other income (expense), net

     1,002        1,656        564        472        (1,358
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (64,621     35,701        47,030        41,728        56,040   

Provision for income taxes

     (910     (6,216     (9,157     (11,953     (9,972
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ (65,531   $ 29,485      $ 37,873      $ 29,775      $ 46,068   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

          

Basic

   $ (2.74   $ 1.24      $ 1.58      $ 1.18      $ 1.84   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (2.74   $ 1.22      $ 1.56      $ 1.16      $ 1.81   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net (loss) income per share:

          

Basic

     23,897,651        23,782,540        24,027,179        25,203,445        25,026,039   

Diluted

     23,897,651        24,077,479        24,335,819        25,607,249        25,453,390   

Consolidated Balance Sheet Data:

          

Cash and cash equivalents

   $ 105,150      $ 82,322      $ 97,890      $ 99,875      $ 139,721   

Working capital

   $ 142,555      $ 155,869      $ 159,065      $ 166,021      $ 202,036   

Total assets

   $ 610,214      $ 696,410      $ 625,745      $ 562,321      $ 525,930   

Current ratio

     1.7        1.7        1.8        1.9        2.4   

Long-term debt

   $ —       $ —       $ —       $ —       $ 10,852   

Stockholders’ equity

   $ 392,191      $ 441,989      $ 416,083      $ 361,532      $ 358,988   

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read this discussion together with the financial statements, related notes and other financial information included in this Annual Report. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under Part I, Item 1A—“Risk Factors” and elsewhere in this Annual Report. These risks could cause our actual results to differ materially from any future performance suggested below.

Overview

We are a global provider of high-quality, technologically advanced flexible printed circuits and value-added component assembly solutions to the electronics industry. We believe that we are one of a limited number of manufacturers that provide a seamless, integrated flexible printed circuit and assembly solution from design and application engineering and prototyping through high-volume fabrication, component assembly and testing. We target our solutions within the electronics market and, in particular, our solutions enable our customers to achieve a desired size, shape, weight or functionality of the device. Current examples of applications for our products include mobile phones, smartphones, tablets, personal computers, consumer products, portable bar code scanners, computer/data storage and medical devices. We provide our solutions to original equipment manufacturers (“OEMs”) such as Apple, Inc., and to electronic manufacturing services (“EMS”) providers such as Foxconn Electronics, Inc., Protek (Shanghai) Limited and Flextronics International Ltd. Our business model, and the way we approach the markets which we serve, is based on value added engineering and providing technology solutions to our customers facilitating the miniaturization of portable electronics. We currently rely on a core mobility end-market for nearly all of our revenue. We believe this dynamic market offers fewer, but larger, opportunities than other electronic markets do, and changes in market leadership can occur with little to no warning. Through early supplier involvement with customers, we look to assist in the development of new designs and processes for the manufacturing of their products and, through value added component assembly of components on flex, seek to provide a higher level of product within their supply chain structure. This approach is relatively unique and may or may not always fit with the operating practices of all OEMs. Our ability to add to our customer base may have a direct impact on the relative percentage of each customer’s revenue to total revenues during any reporting period.

We typically have numerous programs in production at any particular time, the life cycle for which is typically around one year. The programs’ prices are subject to intense negotiation and are determined on a program by program basis, dependent on a wide variety of factors, including without limitation, expected volumes, assumed yields, material costs, actual yields, and the amount of third party components within the program. Our profitability is dependent upon how we perform against our targets and the assumptions on which we base our prices for each particular program. Our volumes, margins and yields also vary from program to program and, given various factors and assumptions on which we base our prices, are not necessarily indicative of our profitability. In fact, some lower-priced programs have higher margins while other higher-priced programs have lower margins. Given that the programs in production vary from period to period and the pricing and margins between programs vary widely, volumes are not necessarily indicative of our performance. For example, we could experience an increase in volumes for a particular program during a particular period, but depending on that program’s margins and yields and the other programs in production during that period, those higher volumes may or may not result in an increase in overall profitability.

From our inception in 1984 until 1989, we were engaged primarily in the manufacturing of flexible printed circuits for military and aerospace applications. In early 1990, we began to develop the concept of attaching components on flexible printed circuits for Motorola. Through these early efforts, we developed the concept of the value-added approach with respect to integrating our design engineering expertise with our component assembly capabilities. This strategy has enabled us to capitalize on two trends over the course of the 1990s, the outsourcing by OEMs of their manufacturing needs and the shift of manufacturing facilities outside of the United States. In 1994, we formed a wholly owned Chinese subsidiary to better serve customers that have production facilities in Asia and provide a cost-effective, high-volume production platform for the manufacture of our

 

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products. In fiscal 2002, we formed a second wholly owned subsidiary in China to further expand our flexible printed circuit manufacturing and assembly capacity, and we merged these two subsidiaries into one in fiscal 2010. In addition, we formed another wholly owned subsidiary in Chengdu, China, and in fiscal 2011, completed construction on our third and fourth manufacturing facilities in China as part of our continued capacity expansion initiative. Our Chinese subsidiaries provide a complete range of capabilities and services to support our global customer base, including design engineering and high-volume production of single-sided, double-sided and multi-layer flexible printed circuits and component assemblies.

Net Sales

We design and manufacture our products to customer specifications. Throughout fiscal 2013, we engaged the services of certain non-exclusive sales representatives located throughout North America and Asia to provide customer contacts and market our products directly to our global customer base. The varieties of products our customers manufacture are referred to as programs. The majority of our sales are made to customers outside of the United States, and therefore sales volumes may be impacted by customer program and product mix changes as well as delivery schedule changes imposed on us by our customers. All sales from our Irvine, California executive office, Singapore regional office and our United Kingdom facility are denominated in U.S. dollars. All sales from our China facilities are denominated in U.S. dollars for sales outside China or RMB for sales made in China.

Cost of Sales

Cost of sales consisted of four major categories: material, overhead, labor and purchased process services. Material cost relates primarily to the purchase of copper foil, gold, polyimide substrates and electronic components. Overhead costs included all materials and facility costs associated with manufacturing support, processing supplies and expenses, support personnel costs, stock-based compensation expense related to such personnel, utilities, amortization of facilities and equipment and other related costs. Labor cost included the cost of personnel related to the manufacture of the completed product. Purchased process services related to the subcontracting of specific manufacturing processes to outside contractors. Cost of sales may be impacted by timing of wage increases at our manufacturing facilities, capacity utilization, manufacturing yields, product mix and production efficiencies. Also, we may be subject to increased costs as a result of changing material prices because we do not have long-term fixed supply agreements, inflation may occur in countries in which we produce and market wage rate increases may also occur in these countries.

Research and Development

Research and development costs are incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes and are expensed as incurred.

Sales and Marketing

Sales and marketing expense included commissions paid to sales representatives, personnel-related and travel costs associated with sales and marketing, program management, corporate development and engineering support groups, sales support, trade shows, freight out, costs to warehouse and manage hub inventories positioned near our customers, market studies and promotional and marketing brochures.

General and Administrative

General and administrative expense primarily included personnel-related and travel costs associated with finance/accounting, tax, internal audit, legal, human resources, information services and executive personnel along with other expenses related to external accounting, legal and professional expenses, business insurance, management information systems, investor relations, Board of Directors and other corporate office expenses.

 

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Impairment and Restructuring

Asset impairment is the difference between the fair market value, based on the estimated future cash flows of the underlying assets, and the carrying value, or net book value, of the assets. Impairment occurs when the carrying value exceeds the fair market value of the underlying assets. Restructuring expense represents severance, relocation, and other costs and recoveries related to the closure or disposal of a business unit or location.

Interest Income

Interest income consisted primarily of interest income earned on cash and cash equivalents balances.

Interest Expense

Interest expense consisted of expense incurred on unused line fees on our revolving facilities and interest related to our deferred financing costs.

Other Income (Expense), Net

Other income (expense), net, consisted primarily of the gain or loss on foreign currency exchange and the gain or loss on derivative financial instruments.

Provision for Income Taxes

We record a provision for income taxes based on the statutory rates applicable in the countries in which we do business, subject to any tax holiday periods granted by the respective governmental authorities. We account for income taxes under the Financial Accounting Standards Board (“FASB”) authoritative guidance which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Critical Accounting Policies and Estimates

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to inventories, income taxes, accounts receivable allowance and warranty. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions.

Critical accounting policies for us include revenue recognition, inventories and income taxes. Refer to Note 1 “Basis of Presentation and Significant Accounting Policies” in the Notes to Consolidated Financial Statements for a complete list of our significant accounting policies.

 

   

Revenue Recognition. Revenues, which we refer to as net sales, are generated from the sale of flexible printed circuit boards and assemblies, which are sold to OEMs, subcontractors and EMS providers to be included in other electronic products. An EMS provider may or may not be an OEM subcontractor. We recognize revenue when there is persuasive evidence of an arrangement with the customer that includes a fixed or determinable sales price, when title and risk of loss transfers, when delivery of the

 

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product has occurred in accordance with the terms of the sale and collectability of the related account receivable is reasonably assured. Our remaining obligation to customers after delivery is limited to our warranty obligations on our product. We report sales net of an accounts receivable allowance, refunds and credits, which we estimate based on historical experience.

 

   

Inventories. We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory and write down our inventory based on historical usage and our estimate of expected and future product demand. Actual results may differ from our judgments, and additional write-downs may be required.

 

   

Income Taxes. We determine if our deferred tax assets and liabilities are realizable on an ongoing basis by assessing our need for a valuation allowance and by adjusting the amount of such allowance, as necessary. In determining whether a valuation allowance is required, we have considered taxable income in prior carry back years, expected future taxable income and the feasibility of tax planning initiatives. If we determine that it is more likely than not that we will realize certain of our deferred tax assets for which we previously provided a valuation allowance, an adjustment would be required to reduce the existing valuation allowance. Conversely, if we determine that we would not be able to realize our recorded net deferred tax asset, an adjustment to increase the valuation allowance would be charged to our results of operations in the period such conclusion was reached.

We operate within multiple domestic and foreign taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended period of time for resolution. Although we believe that adequate consideration has been made for such issues, it is possible that the ultimate resolution of such issues could be significantly different than originally estimated.

Results of Operations

The following table sets forth our consolidated statements of income data, expressed as a percentage of net sales for the periods indicated.

 

     Fiscal Years Ended September 30,  
         2013             2012             2011      

Net sales

     100.0     100.0     100.0

Cost of sales

     100.1        89.9        87.4   
  

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (0.1     10.1        12.6   

Operating expenses:

      

Research and development

     1.0        0.9        1.3   

Sales and marketing

     2.9        3.0        3.0   

General and administrative

     2.2        2.4        2.3   

Stock-based compensation expense resulting from change in control

     1.2        —         —    

Impairment and restructuring

     1.0        (0.3     0.5   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     8.3        6.0        7.1   
  

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (8.4     4.1        5.5   

Other income (expense), net:

      

Interest income

     0.1        0.2        0.1   

Interest expense

     (0.1     (0.1     (0.0

Other income (expense), net

     0.1        0.2        0.0   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (8.3     4.4        5.6   

Provision for income taxes

     (0.1     (0.8     (1.1
  

 

 

   

 

 

   

 

 

 

Net (loss) income

     (8.4 )%      3.6     4.5
  

 

 

   

 

 

   

 

 

 

 

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Fiscal Year Ended September 30, 2013 Compared to Fiscal Year Ended September 30, 2012

Net Sales. Net sales decreased to $787.6 million in the fiscal year ended September 30, 2013, from $818.9 million in the fiscal year ended September 30, 2012. The decrease of $31.3 million, or 3.8%, was primarily due to decreased net sales into our smartphone and tablet sectors, partially offset by increased net sales into our consumer electronics sector, as further quantified below.

Net sales into our smartphones sector decreased to $561.7 million in the fiscal year ended September 30, 2013, from $564.5 million in the fiscal year ended September 30, 2012. The decrease of $2.8 million, or 0.5%, was primarily due to sales decreases to two large customers of $16.7 million in fiscal 2013 versus fiscal 2012. This was primarily due to lower volumes to one OEM that lost global market share. We have been adding customers to diversify our revenue base. Sales to these newer customers increased $18.0 million to $59.8 million in fiscal 2013 from $41.8 million in fiscal 2012 in this sector. For the fiscal years ended September 30, 2013 and 2012, our smartphones sector accounted for approximately 71% and 69% of total net sales, respectively.

Net sales into our tablets sector decreased to $163.9 million in the fiscal year ended September 30, 2013, from $219.6 million in fiscal 2012. The decrease of $55.7 million, or 25.4%, was primarily due to reduced pricing for products from one of our key customers in this sector. For the fiscal years ended September 30, 2013 and 2012, our tablets sector accounted for approximately 21% and 27% of total net sales, respectively.

Net sales into our consumer electronics sector increased to $51.4 million in the fiscal year ended September 30, 2013, from $15.2 million in the fiscal year ended September 30, 2012. The increase of $36.2 million, or 238.2%, was primarily due to higher sales volumes for one of our customer’s programs in this sector of approximately $24.1 million, coupled with expansion into new products, such as personal computers, in this sector of approximately $6.7 million. For the fiscal years ended September 30, 2013 and 2012, our consumer electronics sector accounted for approximately 7% and 2% of total net sales, respectively.

Cost of Sales and Gross (Loss) Profit. Cost of sales as a percentage of net sales increased to 100.1% in the fiscal year ended September 30, 2013, from 89.9% in the fiscal year ended September 30, 2012. The increase in cost of sales as a percentage of net sales of 10.2% was primarily attributable to lower plant capacity utilization as a result of our capacity expansion in fiscal 2012 (580 basis points), reduced pricing and changes in product mix toward lower margin programs (255 basis points) and non-recurring specific inventory write-downs (185 basis points). Gross loss was $1.1 million in the fiscal year ended September 30, 2013, compared to gross profit of $82.7 million in the fiscal year ended September 30, 2012. As a percentage of net sales, gross loss was 0.1% for the fiscal year ended September 30, 2013, compared to gross profit of 10.1% for the fiscal year ended September 30, 2012.

Research and Development. Research and development expense increased by $0.2 million to $7.8 million in the fiscal year ended September 30, 2013, from $7.6 million in the fiscal year ended September 30, 2012, an increase of 2.6%. As a percentage of net sales, research and development expense increased to 1.0% in the fiscal year ended September 30, 2013, from 0.9% in the fiscal year ended September 30, 2012.

Sales and Marketing. Sales and marketing expense decreased by $1.8 million to $22.7 million in the fiscal year ended September 30, 2013, from $24.5 million in the fiscal year ended September 30, 2012, a decrease of 7.3%. The decrease was primarily attributable to lower variable expenses due to sales mix. As a percentage of net sales, sales and marketing expense decreased to 2.9% in the fiscal year ended September 30, 2013, from 3.0% in the fiscal year ended September 30, 2012.

General and Administrative. General and administrative expense decreased by $2.7 million to $17.1 million in the fiscal year ended September 30, 2013, from $19.8 million in the fiscal year ended September 30, 2012, a decrease of 13.6%. The decrease was attributable primarily to our efforts to reduce discretionary spending. As a percentage of net sales, general and administrative expense decreased to 2.2% for the fiscal year ended September 30, 2013, from 2.4% in the fiscal year ended September 30, 2012.

 

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Stock-based compensation expense resulting from change in control. Stock-based compensation expense resulting from change in control was $9.6 million for the fiscal year ended September 30, 2013. This expense is related to the accelerated vesting of outstanding serviced-based restricted stock units (“RSUs”) and stock appreciation rights, as well as the conversion of performance-based RSUs to service-based RSUs for awards outstanding as of May 23, 2013 as part of our Change in Control. Refer to Note 9 “Stock-Based Compensation” in the Notes to Consolidated Financial Statements for further details.

Impairment and Restructuring. A goodwill impairment charge of $7.5 million was recorded during the fiscal year ended September 30, 2013. Refer to Note 11 “Impairment and Restructuring” in the Notes to Consolidated Financial Statements for further details. Impairment and restructuring consisted of recoveries of $2.5 million for the fiscal year ended September 30, 2012, which was the result of a gain on sale of our former corporate headquarters building and our former property in Arizona. Currently, our long-lived assets at our operating and production facilities are classified as held for use within MFLEX’s asset grouping and are evaluated for impairment using the held for use model. If the forecasted undiscounted cash flows significantly decline in the future, we may be required to record long-lived asset impairment charges. In addition, if we decide to close certain operating or production facilities in the future while meeting the held for sale classification criteria, impairment charges may be required for the difference between the carrying value and the fair value of the long-lived assets to be disposed of.

Interest Income. Interest income decreased to $0.7 million in the fiscal year ended September 30, 2013, from $1.4 million in the fiscal year ended September 30, 2012, a decrease of $0.7 million. The decrease was primarily a result of decreased interest rates on our cash held by foreign institutions.

Other Income (Expense), Net. Other income (expense), net decreased to income of $1.0 million in the fiscal year ended September 30, 2013, from income of $1.7 million in the fiscal year ended September 30, 2012, a decrease of $0.7 million. The decrease in income was primarily attributable to fluctuations from foreign exchange due to the movement of the U.S. dollar versus the RMB and other foreign currencies.

Income Taxes. The effective tax rate for the fiscal years ended September 30, 2013 and 2012 was (1.4)% and 17.4%, respectively. The change in our effective tax rate was primarily due to establishing a valuation allowance against deferred tax assets related to one of our entities in fiscal 2013 as well as our income and tax expense distribution by region.

Guidance

Net Sales. For our first quarter of fiscal 2014, we expect net sales to be between $190 and $220 million based on the anticipated product mix, net sales volume and production build plans.

Cost of Sales and Gross Profit. For our first quarter of fiscal 2014, we expect gross margin to be break-even based on the anticipated product mix, net sales volume and production build plans.

Operating Expenses. We expect operating expenses to be approximately between $13 and $14 million during our first fiscal quarter of 2014.

Income Taxes. We expect the effective tax rate, on average, to be in the low twenties in the long-term.

Capital Expenditures. For our first quarter of fiscal 2014, we are anticipating capital expenditures to be less than $10 million. For the foreseeable future, we intend to limit our capital expenditures to normal equipment replacement and investments in automation.

These projections are subject to substantial uncertainty. See Item 1A of Part I, “Risk Factors.”

 

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Fiscal Year Ended September 30, 2012 Compared to Fiscal Year Ended September 30, 2011

Net Sales. Net sales decreased to $818.9 million in the fiscal year ended September 30, 2012, from $831.6 million in the fiscal year ended September 30, 2011. The decrease of $12.7 million, or 1.5%, was primarily due to decreased net sales into our smartphone sector, partially offset by increased net sales into our tablet and consumer electronics sectors, as further quantified below.

Net sales into our smartphones sector decreased to $564.5 million in the fiscal year ended September 30, 2012, from $686.0 million in the fiscal year ended September 30, 2011. The decrease of $121.5 million, or 17.7%, was primarily due to lower sales volumes to one of our major customers. For the fiscal years ended September 30, 2012 and 2011, our smartphones sector accounted for approximately 69% and 83% of total net sales, respectively.

Net sales into our tablets sector increased to $219.6 million in the fiscal year ended September 30, 2012, from $110.4 million in fiscal 2011. The increase of $109.2 million, or 98.9%, was primarily due to increased volumes of 103% as a result of increased demand for products from one of our key customers in this sector. Average selling prices were relatively flat year over year in this sector. For the fiscal years ended September 30, 2012 and 2011, our tablets sector accounted for approximately 27% and 13% of total net sales, respectively.

Net sales into our consumer electronics sector increased to $15.2 million in the fiscal year ended September 30, 2012, from $8.5 million in the fiscal year ended September 30, 2011. The increase of $6.7 million, or 78.8%, was primarily due to higher sales volumes for one of our customer’s programs. For the fiscal years ended September 30, 2012 and 2011, our consumer electronics sector accounted for approximately 2% and 1% of total net sales, respectively.

Cost of Sales and Gross Profit. Cost of sales as a percentage of net sales increased to 89.9% in the fiscal year ended September 30, 2012, from 87.4% in the fiscal year ended September 30, 2011. The increase in cost of sales as a percentage of net sales of 2.5% was primarily attributable to increased wage and benefit costs in China accounting for approximately 115 basis points, higher utilities and manufacturing costs as a result of our capacity expansion accounting for approximately 110 basis points, appreciation of the RMB accounting for approximately 95 basis points, increased depreciation accounting for approximately 90 basis points as a result of the capacity expansion previously mentioned and increased yield loss, particularly in the fourth fiscal quarter of 2012, related to a new program launch accounting for approximately 40 basis points. These increases were partially offset by lower material costs due to changes in program mix year over year accounting for approximately 200 basis points. Gross profit decreased to $82.7 million in the fiscal year ended September 30, 2012, from $104.7 million in the fiscal year ended September 30, 2011, or 21.0%. As a percentage of net sales, gross profit decreased to 10.1% for the fiscal year ended September 30, 2012, from 12.6% for the fiscal year ended September 30, 2011.

Research and Development. Research and development expense decreased by $2.9 million to $7.6 million in the fiscal year ended September 30, 2012, from $10.5 million in the fiscal year ended September 30, 2011, a decrease of 27.6%. The decrease was primarily due to our decision to realign our global research and development activities in the United States and the United Kingdom and move certain research and development to China, where labor costs are lower. As a percentage of net sales, research and development expense decreased to 0.9% for the fiscal year ended September 30, 2012, from 1.3% in the fiscal year ended September 30, 2011.

Sales and Marketing. Sales and marketing expense decreased by $0.7 million to $24.5 million in the fiscal year ended September 30, 2012, from $25.2 million in the fiscal year ended September 30, 2011, a decrease of 2.8%. The decrease was primarily attributable to lower variable expenses due to sales mix. As a percentage of net sales, sales and marketing expense remained flat in the fiscal year ended September 30, 2012 when compared to the fiscal year ended September 30, 2011.

General and Administrative. General and administrative expense increased by $1.0 million to $19.8 million in the fiscal year ended September 30, 2012, from $18.8 million in the fiscal year ended September 30, 2011, an increase of 5.3%. The increase was attributable primarily to increases in third party professional fees associated with projects undertaken to evaluate various business opportunities. As a percentage of net sales, general and administrative expense increased to 2.4% for the fiscal year ended September 30, 2012, from 2.3% in the fiscal year ended September 30, 2011.

 

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Impairment and Restructuring. During the fiscal year ended September 30, 2012, we recorded a net restructuring gain of $2.5 million, which consisted primarily of a gain on sale of our previously impaired properties in Arizona and California.

Interest Income. Interest income increased to $1.4 million in the fiscal year ended September 30, 2012, from $0.9 million in the fiscal year ended September 30, 2011, an increase of $0.5 million. The increase was primarily a result of increased interest rates on our cash held by foreign institutions.

Other Income (Expense), Net. Other income (expense), net increased to income of $1.7 million in the fiscal year ended September 30, 2012, from income of $0.6 million in the fiscal year ended September 30, 2011, an increase of $1.1 million. The increase in income was primarily attributable to fluctuations from foreign exchange due to the movement of the U.S. dollar versus the RMB and other foreign currencies, as well as gains from foreign currency programs (such as forward contracts) to help mitigate the risk of foreign currency movements.

Income Taxes. The effective tax rate for the fiscal year ended September 30, 2012 and 2011 was 17.4% and 19.5%, respectively.

Liquidity and Capital Resources

Our principal sources of liquidity have been cash provided by operations and our ability to borrow under our various credit facilities. Our principal uses of cash have been to finance working capital, facility expansions, stock repurchases and other capital expenditures. We anticipate these uses will continue to be our principal uses of cash in the future. Global financial and credit markets have been volatile in recent years, and future adverse conditions of these markets could negatively affect our ability to secure funds or raise capital at a reasonable cost, if needed.

We believe that funds generated from our operations and available from our borrowing facilities will be sufficient to fund current business operations as well as anticipated growth over at least the next fiscal year, without the need to repatriate earnings. Undistributed earnings of our foreign subsidiaries amounted to approximately $152,302, $217,255 and $184,994 for the fiscal years ended September 30, 2013, 2012 and 2011, respectively.

The following table sets forth, for the years indicated, our net cash flows provided by (used in) operating, investing and financing activities, our period-end cash and cash equivalents and certain other operating measures:

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  
     (dollars in thousands)  

Net cash provided by operating activities

   $ 73,370      $ 68,283      $ 60,365   

Net cash used in investing activities

   $ (44,569   $ (74,606   $ (63,394

Net cash used in financing activities

   $ (4,908   $ (9,630   $ (1,876

Cash and cash equivalents at year end

   $ 105,150      $ 82,322      $ 97,890   

Days sales outstanding

     68.0        69.4        64.9   

Days inventory outstanding

     48.3        51.8        40.6   

Days payable outstanding

     83.6        88.6        79.2   

Net working capital days

     32.7        32.6        26.3   

 

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Changes in the principal components of operating cash flows in our fiscal year ended September 30, 2013 were as follows:

 

   

Our net accounts receivable decreased to $132.2 million as of September 30, 2013 from $165.4 million as of September 30, 2012, or 20.1%, primarily due to improved collection efforts coupled with decreased sales in the fourth fiscal quarter of 2013 compared to the same period the previous year. Our inventory balance decreased to $86.9 million as of September 30, 2013 from $124.8 million as of September 30, 2012. The decrease was primarily the result of reduced anticipated demand in the first fiscal quarter of 2014 compared to the same period the previous year, coupled with improved inventory turns of approximately 3.5 days. Our accounts payable balance decreased to $166.5 million as of September 30, 2013 from $199.7 million as of September 30, 2012, a decrease of 16.6%. The decrease in accounts payable was primarily the result of reduced inventory purchases.

 

   

Depreciation and amortization expense was $58.2 million for the fiscal year ended September 30, 2013, versus $53.1 million for the comparable period of the prior year, an increase of $5.1 million. This was primarily due to an increased fixed asset base in manufacturing operations in China.

Our principal investing and financing activities in our fiscal year ended September 30, 2013 were as follows:

 

   

Net cash used in investing activities was $44.6 million for the fiscal year ended September 30, 2013. Capital expenditures included cash purchases of $47.3 million of capital equipment and other assets, which were primarily related to purchases of assets for new programs in China. Proceeds from sales of equipment and assets held for sale of $2.8 million was primarily due to cash proceeds of $1.6 million from the sale of a manufacturing facility in Suzhou, China and $1.2 million from other property and equipment sales.

 

   

Net cash used in financing activities was $4.9 million for the fiscal year ended September 30, 2013 and consisted primarily of repurchases of common stock of $2.1 million and $3.5 million of tax withholdings for net share settlements of equity awards to employees. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2013 and September 30, 2012.

Changes in the principal components of operating cash flows in our fiscal year ended September 30, 2012 were as follows:

 

   

Our net accounts receivable increased to $165.4 million as of September 30, 2012 from $150.5 million as of September 30, 2011, or 9.9%, primarily due to increase sales in our fourth fiscal quarter of 2012 versus the same period in the prior year. Due to the timing of new program ramps, a substantial portion of our fourth fiscal quarter revenues were recognized late in the quarter, which resulted in a large accounts receivable balance not due until the first fiscal quarter of 2013. Our net inventory balance increased to $124.8 million as of September 30, 2012 versus $87.2 million as of September 30, 2011. The increase was primarily the result of customer requests to stock finished goods inventory at our hub locations that are close in proximity to Electronic Manufacturing Services (“EMS”) facilities where the end product handset or tablet is assembled in preparation for our increased volume during our first fiscal quarter of 2013. Our accounts payable balance increased to $199.7 million as of September 30, 2012 from $162.8 million as of September 30, 2011, an increase of 22.7%. The increase in accounts payable was primarily the result of the timing of inventory purchases and more favorable vendor payment terms. Purchases increased towards the end of our fourth fiscal quarter of 2012 to support increased production volumes and the corresponding payables are not due until the latter half of the first quarter of fiscal 2013.

 

   

Depreciation and amortization expense was $53.1 million for the fiscal year ended September 30, 2012, versus $45.5 million for the comparable period of the prior year, an increase of $7.6 million. This was primarily due to an increased fixed asset base in manufacturing operations in China.

 

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Our principal investing and financing activities in our fiscal year ended September 30, 2012 were as follows:

 

   

Net cash used in investing activities was $74.6 million for the fiscal year ended September 30, 2012. Capital expenditures included cash purchases of $86.1 million of capital equipment and other assets, which were primarily related to our manufacturing capacity expansion in China. Proceeds from sales of equipment and assets held for sale of $11.4 million was primarily due to cash proceeds of $7.5 million and $1.9 million from the sale of our corporate headquarters previously located in Anaheim, California and our former Aurora Optical facility in Arizona, respectively.

 

   

Net cash used in financing activities was $9.6 million for the fiscal year ended September 30, 2012 and consisted primarily of repurchases of common stock of $8.8 million and $1.1 million of tax withholdings for net share settlements of equity awards to employees. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2012 and September 30, 2011.

Changes in the principal components of operating cash flows in our fiscal year ended September 30, 2011 were as follows:

 

   

Our net accounts receivable increased to $150.5 million as of September 30, 2011 from $149.5 million as of September 30, 2010, or 0.7%. The increase in accounts receivable was primarily due to increased sales as the result of changes in payment terms with certain customers. Our net inventory balance increased to $87.2 million as of September 30, 2011 versus $76.9 million as of September 30, 2010, primarily as the result of customer requests to stock finished goods inventory at our hub locations that are close in proximity to EMS facilities where the end product handset or tablet is assembled. Our accounts payable balance increased to $162.8 million as of September 30, 2011 from $156.9 million as of September 30, 2010, an increase of 3.8%. The increase in accounts payable was primarily the result of more favorable vendor payment terms.

 

   

Depreciation expense was $44.6 million for the fiscal year ended September 30, 2011, versus $42.2 million for the comparable period of the prior year, primarily due to an increased fixed asset base in manufacturing operations in China and partially offset by dispositions of equipment associated with our restructuring activities in the United Kingdom, Malaysia and Anaheim. Amortization expense was $0.9 million for fiscal 2011, versus $2.3 million for the comparable period of the prior year mainly due to the decision to fully impair our intangibles assets as of September 30, 2010.

Our principal investing and financing activities in our fiscal year ended September 30, 2011 were as follows:

 

   

Net cash used in investing activities was $63.4 million for the fiscal year ended September 30, 2011. Capital expenditures included cash purchases of $79.8 million of capital equipment and other assets, which were primarily related to our manufacturing capacity expansion in China. In addition, United States treasury bills amounting to $15.0 million were redeemed during the first fiscal quarter of 2011. As of September 30, 2011, we had outstanding purchase commitments, which exclude amounts already recorded on the Consolidated Balance Sheets, totaling $8.1 million primarily related to capital projects at our various facilities.

 

   

Net cash used in financing activities was approximately $1.9 million for the fiscal year ended September 30, 2011 and consisted of repurchases of common stock of $1.9 million and $1.3 million of tax withholdings for net share settlement of equity awards to employees, partially offset by $1.3 million of proceeds from exercise of stock options and income tax benefit related to stock option exercises. Our loans payable and borrowings outstanding against credit facilities were zero at September 30, 2011 and September 30, 2010.

 

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Capital Commitments

As of September 30, 2013, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of the SEC’s Regulation S-K. The following summarizes our contractual obligations, excluding amounts already recorded on the Consolidated Balance Sheets at September 30, 2013, and the effect those obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

 

     Payments Due by Period  

Contractual Obligations

   Total      Less than
1 year
     2 to 3
years
     4 to 5
years
     More than
5 years
 

Operating leases

   $ 1,890       $ 1,304       $ 584       $ 2       $ —    

Unconditional purchase obligations

     6,454         6,454         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 8,344       $ 7,758       $ 584       $ 2       $ —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2013, we recorded $17.3 million in long-term liabilities related to uncertain tax positions. We are not able to reasonably estimate the timing of the long-term payments, or the amount by which our liability will increase or decrease over time; therefore, the liability on uncertain tax positions has not been included in the contractual obligations table.

Recent Accounting Pronouncements

Refer to Note 1 “Basis of Presentation and Significant Accounting Policies” in the Notes to Consolidated Financial Statements for further details.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss arising from adverse changes in liquidity, market rates and foreign exchange rates. At September 30, 2013, no amounts were outstanding under our loan agreements with Bank of China Co., Ltd., JPMorgan Chase Bank, N.A., Agricultural Bank of China or China Construction Bank. The amounts outstanding under these loan agreements at any time may fluctuate and we may, from time to time, be subject to refinancing risk. We do not believe that a change of 100 basis points in the interest rate would have a material effect on our results of operations or financial condition based on our current borrowing level.

Foreign Currency Risk

We derive a substantial portion of our sales outside of the U.S. Approximately $757.9 million, or 96%, of total shipments to these foreign manufacturers during fiscal 2013 were made in U.S. dollars with the remaining balance of our net sales denominated in RMB. We currently have a significant portion of our expenses, more specifically cost of sales, denominated in RMB, whereby a significant appreciation or depreciation in the RMB could materially affect our reported expenses in U.S. dollars. The exchange rate for the RMB to the U.S. dollar has been an average of 6.24 RMB per U.S. dollar for fiscal 2013. To date, we attempt to manage our working capital in a manner to minimize foreign currency exposure and from time to time, we may engage in currency hedging activities through use of forward contracts, but such activities may not be able to limit the risks of currency fluctuations and we continue to be vulnerable to appreciation or depreciation of foreign currencies against the U.S. dollar. The changes in fair value of the outstanding forward contracts are recognized in earnings during the period of change as other income (expense), net in the Consolidated Statements of Comprehensive Income. We recognized a gain of $0.9 million during the fiscal year ended September 30, 2013 related to these forward contracts.

Liquidity Risk

We believe our anticipated cash flows from operations are sufficient to fund our operations, including capital expenditure requirements, through at least the next fiscal year. If there was a need for additional cash to fund our operations, we would access our global credit lines.

 

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Item 8. Financial Statements and Supplementary Data

MULTI-FINELINE ELECTRONIX, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     44   

Consolidated Balance Sheets as of September 30, 2013 and 2012

     45   

Consolidated Statements of Comprehensive Income for the Fiscal Years Ended September  30, 2013, 2012 and 2011

     46   

Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended September  30, 2013, 2012 and 2011

     47   

Consolidated Statements of Cash Flows for the Fiscal Years Ended September 30, 2013, 2012  and 2011

     48   

Notes to Consolidated Financial Statements

     49   

Quarterly Financial Summary (unaudited)

     73   

Schedule II—Consolidated Valuation and Qualifying Accounts and Reserves for the Fiscal Years Ended September 30, 2013, 2012 and 2011

     79   

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Multi-Fineline Electronix, Inc:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, stockholders’ equity, and cash flows present fairly, in all material respects, the financial position of Multi-Fineline Electronix, Inc. and its subsidiaries at September 30, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2013 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index appearing under Item 15 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Irvine, California

November 13, 2013

 

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MULTI-FINELINE ELECTRONIX, INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Data)

 

     September 30,  
     2013      2012  

ASSETS

     

Cash and cash equivalents

   $ 105,150       $ 82,322   

Accounts receivable, net of allowances of $4,281 and $2,254 at September 30, 2013 and 2012, respectively

     132,247         165,408   

Inventories

     86,853         124,770   

Deferred taxes

     5,909         6,100   

Income taxes receivable

     2,535         2,586   

Other current assets

     8,821         10,531   
  

 

 

    

 

 

 

Total current assets

     341,515         391,717   

Property, plant and equipment, net

     244,056         274,886   

Land use rights

     7,703         7,030   

Deferred taxes

     11,685         8,622   

Goodwill

     —          7,537   

Other assets

     5,255         6,618   
  

 

 

    

 

 

 

Total assets

   $ 610,214       $ 696,410   
  

 

 

    

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Accounts payable

   $ 166,474       $ 199,737   

Accrued liabilities

     31,459         33,718   

Income taxes payable

     1,027         2,393   
  

 

 

    

 

 

 

Total current liabilities

     198,960         235,848   

Other liabilities

     19,063         18,573   
  

 

 

    

 

 

 

Total liabilities

     218,023         254,421   

Commitments and contingencies (Note 8)

     

Stockholders’ equity

     

Preferred stock, $0.0001 par value, 5,000,000 and 5,000,000 shares authorized at September 30, 2013 and 2012, respectively; 0 and 0 shares issued and outstanding at September 30, 2013 and 2012, respectively

     —          —    

Common stock, $0.0001 par value; 100,000,000 and 100,000,000 shares authorized at September 30, 2013 and 2012, respectively; 24,082,802 and 23,762,721 shares issued and outstanding at September 30, 2013 and 2012, respectively

     2         2   

Additional paid-in capital

     90,857         82,847   

Retained earnings

     252,656         318,187   

Accumulated other comprehensive income

     48,676         40,953   
  

 

 

    

 

 

 

Total stockholders’ equity

     392,191         441,989   
  

 

 

    

 

 

 

Total liabilities and stockholders’ equity

   $ 610,214       $ 696,410   
  

 

 

    

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MULTI-FINELINE ELECTRONIX, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In Thousands, Except Per Share and Share Data)

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Net sales

   $ 787,644      $ 818,932      $ 831,561   

Cost of sales

     788,774        736,241        726,850   
  

 

 

   

 

 

   

 

 

 

Gross (loss) profit

     (1,130     82,691        104,711   

Operating expenses:

      

Research and development

     7,776        7,615        10,485   

Sales and marketing

     22,720        24,457        25,189   

General and administrative

     17,118        19,839        18,788   

Stock-based compensation expense resulting from change in control

     9,582        —         —    

Impairment and restructuring

     7,537        (2,468     4,186   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     64,733        49,443        58,648   
  

 

 

   

 

 

   

 

 

 

Operating (loss) income

     (65,863     33,248        46,063   

Other income (expense), net:

      

Interest income

     727        1,352        875   

Interest expense

     (487     (555     (472

Other income (expense), net

     1,002        1,656        564   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (64,621     35,701        47,030   

Provision for income taxes

     (910     (6,216     (9,157
  

 

 

   

 

 

   

 

 

 

Net (loss) income

     (65,531     29,485        37,873   

Other comprehensive income:

      

Foreign currency translation adjustment

     7,723        1,151        14,251   
  

 

 

   

 

 

   

 

 

 

Total comprehensive (loss) income

   $ (57,808   $ 30,636      $ 52,124   
  

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

      

Basic

   $ (2.74   $ 1.24      $ 1.58   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ (2.74   $ 1.22      $ 1.56   
  

 

 

   

 

 

   

 

 

 

Shares used in computing net (loss) income per share:

      

Basic

     23,897,651        23,782,540        24,027,179   

Diluted

     23,897,651        24,077,479        24,335,819   

The accompanying notes are an integral part of these consolidated financial statements.

 

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MULTI-FINELINE ELECTRONIX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In Thousands, Except Share Data)

 

    Common Stock     Additional
Paid-in
Capital
    Treasury
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Stockholders’
Equity
 
    Shares     Amount            

Balance at September 30, 2010

    23,916,665      $ 2      $ 85,150      $ —       $ 250,829      $ 25,551      $ 361,532   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exercise of stock options

    279,982        —         1,250        —         —         —         1,250   

Stock-based compensation expense

    —         —         4,303        —         —         —         4,303   

Tax benefits from settlements of stock-based equity awards

    —         —         133        —         —         —         133   

Net income

    —         —         —         —         37,873        —         37,873   

Translation adjustment

    —         —         —         —         —         14,251        14,251   

Tax withholdings for net share settlement of equity awards

    (54,044     —         (1,328     —         —         —         (1,328

Repurchase of common stock

    (92,823     —         —         (1,931     —         —         (1,931

Retirement of treasury shares

    —         —         (1,931     1,931        —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2011

    24,049,780      $ 2      $ 87,577      $ —       $ 288,702      $ 39,802      $ 416,083   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exercise of stock options

    211,742        —         168        —         —         —         168   

Stock-based compensation expense

    —         —         4,900        —         —         —         4,900   

Tax benefits from settlements of stock-based equity awards

    —         —         177        —         —         —         177   

Net income

    —         —         —         —         29,485        —         29,485   

Translation adjustment

    —         —         —         —         —         1,151        1,151   

Tax withholdings for net share settlement of equity awards

    (60,401     —         (1,131     —         —         —         (1,131

Repurchase of common stock

    (438,400     —         —         (8,844     —         —         (8,844

Retirement of treasury shares

    —         —         (8,844     8,844        —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

    23,762,721      $ 2      $ 82,847      $ —       $ 318,187      $ 40,953      $ 441,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Exercise of stock options

    655,373        —         607        —         —         —         607   

Stock-based compensation expense

    —         —         13,612        —         —         —         13,612   

Tax shortfall from settlements of stock-based equity awards

    —         —         (665     —         —         —         (665

Net loss

    —         —         —         —         (65,531     —         (65,531

Translation adjustment

    —         —         —         —         —         7,723        7,723   

Tax withholdings for net share settlement of equity awards

    (215,316     —         (3,454     —         —         —         (3,454

Repurchase of common stock

    (119,976     —         —         (2,090     —         —         (2,090

Retirement of treasury shares

    —         —         (2,090     2,090        —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

    24,082,802      $ 2      $ 90,857      $ —       $ 252,656      $ 48,676      $ 392,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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MULTI-FINELINE ELECTRONIX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Cash flows from operating activities

      

Net (loss) income

   $ (65,531   $ 29,485      $ 37,873   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     58,154        53,082        45,530   

Deferred taxes

     (2,523     (2,290     (3,128

Stock-based compensation expense

     13,612        4,900        4,303   

Excess tax benefit related to stock option exercises

     (29     (177     (133

Asset impairments

     7,537        —         —    

Restructuring asset (recoveries) impairments

     —         (2,468     3,384   

(Gain) loss on disposal of equipment

     (1,702     (516     427   

Changes in operating assets and liabilities:

      

Accounts receivable

     33,478        (14,837     (398

Inventories

     44,216        (37,462     (1,560

Other current assets

     1,075        (4,527     (3,157

Other assets

     767        (585     (5,215

Accounts payable

     (9,459     31,349        (21,267

Accrued liabilities

     (5,334     8,046        1,294   

Income taxes payable

     (1,789     1,236        (1,860

Other liabilities

     898        3,047        4,272   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     73,370        68,283        60,365   

Cash flows from investing activities

      

Sales of investments

     —         —         14,991   

Purchases of property and equipment

     (47,333     (86,077     (79,772

Proceeds from sale of property and equipment

     2,764        11,471        1,387   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (44,569     (74,606     (63,394

Cash flows from financing activities

      

Excess tax benefit related to stock option exercises

     29        177        133   

Tax withholdings for net share settlement of equity awards

     (3,454     (1,131     (1,328

Proceeds from exercise of stock options

     607        168        1,250   

Repurchase of common stock

     (2,090     (8,844     (1,931
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (4,908     (9,630     (1,876

Effect of exchange rate changes on cash

     (1,065     385        2,920   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     22,828        (15,568     (1,985

Cash and cash equivalents at beginning of fiscal year

     82,322        97,890        99,875   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of fiscal year

   $ 105,150      $ 82,322      $ 97,890   
  

 

 

   

 

 

   

 

 

 

Non-cash investing activities

      

Purchases of property and equipment

   $ 8,950      $ 34,350      $ 33,965   

Supplemental disclosure

      

Cash paid for interest

   $ 533      $ 528      $ 465   

Cash paid for income taxes

   $ 4,664      $ 6,274      $ 10,821   

The accompanying notes are an integral part of these consolidated financial statements.

 

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MULTI-FINELINE ELECTRONIX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In Thousands, Except Per Share and Share Data)

1. Basis of Presentation and Significant Accounting Policies

Description of the Company

Multi-Fineline Electronix, Inc. (“MFLEX” or the “Company”) was incorporated in 1984 in the State of California and reincorporated in the State of Delaware in June 2004. The Company is primarily engaged in the engineering, design and manufacture of flexible printed circuit boards along with related component assemblies.

WBL Corporation Limited (“WBL”), through its affiliates and subsidiaries, beneficially owned approximately 62% of the Company’s outstanding common stock as of each of September 30, 2013 and September 30, 2012. On May 28, 2013, United Engineers Limited (“UEL”) and its wholly owned subsidiary, UE Centennial Venture Pte. Ltd (“UECV”, and together with UEL, “UE”), filed with the Securities and Exchange Commission (“SEC”) an Initial Statement of Beneficial Ownership of Securities on Form 3 and a Schedule 13D under the Securities Exchange Act of 1934 announcing that UEL, through UECV, owned or had agreed to acquire, pursuant to a cash offer, more than 50% of the ordinary stock units of WBL.

This beneficial ownership of the Company’s common stock by WBL (and UE after May 28, 2013) provides these entities with control over the outcome of stockholder votes at the Company, except with respect to certain related-party transactions with WBL/UE which require a separate vote of the non-WBL/UE stockholders.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company has two wholly owned subsidiaries located in China: MFLEX Suzhou Co., Ltd., (“MFC”) formerly known as Multi-Fineline Electronix (Suzhou No. 2) Co., Ltd. (“MFC2”) and into which Multi-Fineline Electronix (Suzhou) Co., Ltd (“MFC1”) was merged in fiscal 2010, and MFLEX Chengdu Co., Ltd. (“MFLEX Chengdu”); one located in the Cayman Islands: M-Flex Cayman Islands, Inc. (“MFCI”); one located in Singapore: Multi-Fineline Electronix Singapore Pte. Ltd. (“MFLEX Singapore”); one located in Malaysia: Multi-Fineline Electronix Malaysia Sdn. Bhd. (“MFM”); one located in Arizona: Aurora Optical, Inc. (“Aurora Optical”), which was dissolved in September 2012; one located in Cambridge, England: MFLEX UK Limited (“MFE”); one located in Korea: MFLEX Korea, Ltd. (“MKR”); and one located in the Netherlands: MFLEX B.V. (“MNE”). All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used, including, but not limited to, those related to inventories, income taxes, accounts receivable allowance and warranty. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consisted of money market funds as of September 30, 2013 and 2012.

 

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Fair Value Measurements

Per Financial Accounting Standards Board (“FASB”) authoritative guidance, the Company classifies and discloses the fair value of certain of its assets and liabilities in one of the following three categories:

Level 1: quoted market prices in active markets for identical assets and liabilities

Level 2: observable market based inputs or unobservable inputs that are corroborated by market data

Level 3: unobservable inputs that are not corroborated by market data

The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximated fair value due to their short maturities. For recognition purposes, on a recurring basis, the Company’s assets and liabilities related to money market funds and derivative financial instruments are measured at fair value at the end of each reporting period. The fair value of the Company’s money market funds were measured using Level 1 fair value inputs and the fair value of the Company’s derivative assets and liabilities were measured using Level 2 fair value inputs, which consisted of observable market-based inputs of foreign currency spot and forward rates quoted by major financial institutions.

The Company’s assets and liabilities measured at fair value on a recurring basis subject to the disclosure requirements as defined under the FASB authoritative accounting guidance were as follows:

 

     Fair Value Measurements of Assets and Liabilities
on a Recurring Basis as of September 30, 2013
 
         Level 1              Level 2             Level 3      

Money market funds (cash and cash equivalents)

   $ 14,141       $ —       $ —    

Forward contracts (other current assets)

     —          179        —    

Forward contracts (accrued liabilities)

     —          (34     —    
  

 

 

    

 

 

   

 

 

 
   $ 14,141       $ 145      $  —    
  

 

 

    

 

 

   

 

 

 

 

     Fair Value Measurements of Assets and Liabilities
on a Recurring Basis as of September 30, 2012
 
         Level 1              Level 2              Level 3      

Money market funds (cash and cash equivalents)

   $ 12,037       $  —        $  —    
  

 

 

    

 

 

    

 

 

 
   $ 12,037       $ —        $ —    
  

 

 

    

 

 

    

 

 

 

No assets or liabilities were measured at fair value on a non-recurring basis as of September 30, 2013 and September 30, 2012.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consisted primarily of cash, to the extent balances exceeded limits that were insured by the Federal Deposit Insurance Corporation or the equivalent government body in other countries, and accounts receivable. Credit risk exists because the Company’s flexible printed circuit boards and related component assemblies were sold to a limited number of customers during the reporting periods herein (refer to Note 7). The Company does not require collateral and maintains reserves for potential credit losses. Such losses have historically been immaterial and have been within management’s expectations.

Accounts Receivable

The Company records revenues in accordance with the terms of the sale, which is generally at shipment. Accounts receivable are recorded at the invoiced amount, and do not bear interest. The allowance for doubtful

 

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accounts is the Company’s best estimate of the amount of probable credit losses in existing accounts receivable, and the allowance is determined based on historical write-off experience as well as specific identification of credit issues with invoices. The Company reviews the allowance for doubtful accounts monthly (or more often, as necessary), and past due balances over a specified amount are reviewed individually for collectability. All other balances are reviewed on an aggregate basis. Account balances are charged against the allowance if and when the Company determines it is probable that the receivable will not be collected. The Company does not have any off-balance sheet credit exposure related to its customers.

Inventories

Inventories are stated at the lower of cost or market, with cost being determined on a first-in, first-out basis. The Company records a write-down for excess and obsolete inventory based on historical usage and expected future product demand.

Property, Plant and Equipment

Property, plant and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the assets as follows:

 

Buildings and building improvements

   20 - 39 years

Machinery and equipment

   3 -10 years

Furniture and fixtures

   3 - 5 years

Computers and capitalized software

   3 - 5 years

Leasehold improvements

   Shorter of 15 years or life of lease

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted cash flows attributable to such assets, including any cash flows upon their eventual disposition, to their carrying value. If the carrying value of the assets exceeds the forecasted undiscounted cash flows, then the assets are written down to their fair value.

Land Use Rights

Land use rights include long-term leaseholds of land for the Company’s facilities located in China. The Company paid an upfront fee for use of the land use rights and amortizes the expense through expiration.

Long-Lived Asset Impairment

 

The Company tests its long-lived assets for impairment whenever circumstances or events may affect the recoverability of long-lived assets. To determine if an impairment exists, the Company first determines whether there has been a change in the use or circumstance related to the assets and whether a held for use or held for sale impairment model should be used to evaluate the assets or asset group for impairment.

If the assets are held for use, the Company utilizes the forecasted undiscounted cash flows related to the asset group and compares the result to the carrying value. If the forecasted undiscounted cash flows exceed the carrying value, there is no impairment. To develop the forecasted undiscounted cash flows, the Company utilizes a number of estimates and assumptions including the internally developed business assumptions used to compute the forecasted cash flows and related terminal cash flows. If the assets meet the criteria for held for sale classification, the Company determines the estimated fair value for the assets less the applicable disposal costs and compares this value to the carrying value of the long-lived assets. If this value exceeds the carrying value, there is no impairment. In determining these fair value estimates, the Company considers internally generated information and information obtained from discussions with market participants. The determination of fair value requires significant judgment both by the Company and outside experts engaged to assist in this process, if any.

 

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Goodwill

The Company records the assets acquired and liabilities assumed in business combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Valuation of intangible assets entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired.

The Company reviews the recoverability of the carrying value of goodwill on an annual basis typically during its fourth fiscal quarter, or more frequently when an event occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. At June 30, 2013, the Company performed an interim goodwill impairment test on its single reporting unit. Upon completion of the impairment test, the Company determined that its goodwill was impaired and recorded a charge of $7,537 during the fiscal third quarter to fully impair its goodwill, resulting in a balance of $0 as of September 30, 2013. Refer to Note 11 for further details.

Revenue Recognition

The Company’s revenues, which the Company refers to as net sales, net of accounts receivable allowance, refunds and credits, are estimated based on historical experience and are generated from the sale of flexible printed circuit boards and related component assemblies, which are sold to original equipment manufacturers and electronic manufacturing services providers to be included in other electronic products. The Company recognizes revenue when there is persuasive evidence of an arrangement with the customer that states a fixed or determinable sales price, when title and risk of loss transfers, when delivery of the product has occurred in accordance with the terms of the sale and collectability of the related accounts receivable is reasonably assured. The Company does not have any post-shipment obligations (e.g., installation or training) or multiple-element arrangements. The Company’s remaining obligation to its customer after delivery is limited to warranty on its product.

All non-income government-assessed taxes (sales and value added taxes) collected from customers and remitted to governmental agencies are recorded on a net basis (excluded from revenue) in the accompanying consolidated financial statements. Such taxes are recorded in accrued liabilities until they are remitted to the appropriate governmental agencies.

Product Warranty Accrual

The Company typically warrants its products for up to 36 months. The standard warranty requires the Company to replace defective products returned to the Company at no cost to the customer. The Company records an estimate for warranty related costs at the time revenue is recognized based on historical amounts incurred for warranty expense and historical warranty return rates as well as an evaluation of the expected future warranty return rates. If actual warranty return rates differ from the estimated trends based on our historical experience, the Company may adjust the warranty accrual to reflect the actual results. The warranty accrual is included in accrued liabilities in the accompanying Consolidated Balance Sheets.

Changes in the product warranty accrual for the fiscal years ended September 30, 2013, 2012 and 2011, were as follows:

 

     Balance at
Beginning
of Fiscal
Year
     Warranty
Expenditures
    Provision for
Estimated
Warranty Cost
     Balance at
End
of Fiscal
Year
 

Fiscal 2013

   $ 346       $ (3,469   $ 4,199       $ 1,076   

Fiscal 2012

   $ 279       $ (991   $ 1,058       $ 346   

Fiscal 2011

   $ 463       $ (1,137   $ 953       $ 279   

 

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Research and Development

Research and development costs are incurred in the development of new products and processes, including significant improvements and refinements to existing products and processes and are expensed as incurred.

Restructuring Charges

The Company recognizes restructuring charges related to plans to close or consolidate duplicate manufacturing and administrative facilities. In connection with these activities, the Company records restructuring charges for employee termination and relocation costs and other exit-related costs.

The recognition of restructuring charges requires making certain judgments and estimates regarding the nature, timing and amount of costs associated with the planned exit activity. To the extent that actual results differ from these estimates and assumptions, the Company may be required to revise the estimates of future liabilities, requiring the recognition of additional restructuring charges or the reduction of liabilities already recognized. Such changes to previously estimated amounts may be material to the consolidated financial statements. At the end of each reporting period, the Company evaluates the remaining accrued balances to ensure that no excess accruals are retained and the utilization of the provisions are for their intended purpose in accordance with developed exit plans. During the fiscal years ended September 30, 2012 and 2011, the Company recorded restructuring (recoveries) charges of $($2,468) and $4,186, respectively. There were no restructuring activities during the fiscal year ended September 30, 2013 (refer to Note 11).

Income Taxes

Income taxes are computed using the asset and liability method. Under this method, deferred income taxes are recognized by applying enacted statutory tax rates applicable to future years to differences between the tax bases and financial reporting amounts of existing assets and liabilities. Valuation allowances are established when it is more likely than not that such deferred tax assets will not be realized. The Company does not file a consolidated return with its foreign wholly owned subsidiaries.

The Company has a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities, based on the technical merits of the position. The amount recognized is measured as the largest amount of benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefit in income tax expense.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is either the local currency or if the predominant transaction currency is the U.S. dollar, then the U.S. dollar will be the functional currency. Balances are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and an average exchange rate for each period for income statement amounts. Currency translation adjustments are recorded in accumulated other comprehensive income, a component of stockholders’ equity.

Foreign currency transactions occur primarily when there is a receivable or payable denominated in other than the respective entity’s functional currency. The Company records the changes in the exchange rate for these transactions in the Consolidated Statements of Comprehensive Income. For the fiscal years ended September 30, 2013, 2012 and 2011, foreign exchange transaction gains and losses were included in other income (expense), net and were net gains (losses) of $348, $(69) and $(160), respectively.

 

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Derivative Financial Instruments

The Company’s derivative financial instruments are designated to economically hedge the exposure of future cash flows denominated in non-U.S. dollar currency. Derivative financial instruments are measured at fair value and are recorded in the Consolidated Balance Sheets as either assets or liabilities. Changes in the fair value of the derivative financial instruments are recorded each period in the Consolidated Statements of Comprehensive Income, depending on whether the derivative instruments are designated as part of the hedge transaction, and if so, the type of hedge transaction.

The Company evaluates its derivative financial instruments as either cash flow hedges (forecasted transactions), fair value hedges (changes in fair value related to recognized assets or liabilities) or derivative financial instruments that do not qualify for hedge accounting. To qualify for hedge accounting, a derivative financial instrument must be highly effective in mitigating the designated risk of the hedged item. For derivative financial instruments that do not qualify for hedge accounting, changes in the fair value are reported in current period earnings.

The Company designates its derivative financial instruments as non-hedge derivatives and records its foreign currency forward contracts as either assets or liabilities in the Consolidated Balance Sheets. Changes in the fair value of the derivative financial instruments that arise due to fluctuations in the forward exchange rates are recognized in earnings each period as other income (expense), net in the Consolidated Statements of Comprehensive Income. Realized gains (losses) are recognized at maturity as other income (expense), net in the Consolidated Statements of Comprehensive Income. The cash flows from derivative financial instruments are classified as cash flows from operating activities in the Consolidated Statements of Cash Flows. Refer to Note 12 for further information on derivative financial instruments.

Accounting for Stock-Based Compensation

The Company recognizes stock-based compensation expense for all stock-based payment arrangements, net of an estimated forfeiture rate and generally recognizes expense for those shares expected to vest over the requisite service period of the award. For stock options and stock appreciation rights, the Company determines the grant date fair value using the Black-Scholes option-pricing model which requires the input of certain assumptions, including the expected life of the stock-based payment awards, stock price volatility and interest rates. For restricted stock unit valuation, the Company determines the fair value using the closing price of the Company’s common stock on the date of grant.

Net Income Per Share—Basic and Diluted

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding. In computing diluted earnings per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. The impact of potentially dilutive securities is determined using the treasury stock method.

The following table presents a reconciliation of basic and diluted shares:

 

     Fiscal Years Ended September 30,  
     2013      2012      2011  

Basic weighted-average number of common shares outstanding

     23,897,651         23,782,540         24,027,179   

Dilutive effect of potential common shares

     —          294,939         308,640   
  

 

 

    

 

 

    

 

 

 

Diluted weighted-average number of common and potential common shares outstanding

     23,897,651         24,077,479         24,335,819   
  

 

 

    

 

 

    

 

 

 

Potential common shares excluded from the per share computations their inclusion would be anti-dilutive

     903,263         372,530         284,094   
  

 

 

    

 

 

    

 

 

 

 

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Recent Accounting Pronouncements

During July 2013, the FASB issued revised authoritative guidance that requires the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the financial statements when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 (which is October 1, 2014 for the Company). Early adoption is permitted. The Company is currently evaluating this updated authoritative guidance, but it does not expect the adoption of this guidance to have a material impact on its consolidated financial position, results of operations or cash flows.

In February 2013, the FASB issued revised authoritative guidance that requires the presentation in a single location, either in a note or parenthetically on the face of the financial statements, of the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. This guidance is effective prospectively for annual periods beginning after December 15, 2012 (which is October 1, 2013 for the Company). Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

During July 2012, the FASB issued revised authoritative guidance that is intended to reduce the cost and complexity of the impairment test for indefinite-lived intangible assets by providing an entity with the option to first assess qualitatively whether it is necessary to perform the impairment test that is currently in place. An entity would not be required to quantitatively calculate the fair value of an indefinite-lived intangible asset unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments are effective for interim and annual periods beginning after September 15, 2012 (which was October 1, 2012 for the Company). Early adoption is permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

During December 2011, the FASB issued revised authoritative guidance that requires an entity to disclose information about offsetting and related arrangements on its financial position. This includes the effect or potential effect of rights of offset associated with an entity’s recognized assets and recognized liabilities and requires improved information about financial instruments and derivative instruments that are subject to an enforceable master netting arrangement or similar arrangement. During January 2013, the FASB issued an amendment to this guidance, which limits the scope to derivatives, repurchase agreements and securities lending transactions. The amendments are effective for annual periods beginning on or after January 1, 2013 (which is October 1, 2013 for the Company) and retrospective disclosure is required for all comparative periods presented. Early adoption is not permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

During June 2011, the FASB issued revised authoritative guidance that requires all non-owner changes in stockholder’s equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. The amendments were effective for annual periods beginning after December 15, 2011 (which was October 1, 2012 for the Company) and are to be applied retrospectively. Early adoption is permitted. The guidance was adopted by the Company in fiscal 2012 and did not have a material impact on its consolidated financial position, results of operations or cash flows.

During May 2011, the FASB issued revised authoritative guidance that resulted in common principles and requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value” in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The amendments were effective for interim and annual periods beginning after December 15, 2011 (which was January 1, 2012 for the Company) and were to be applied prospectively. Early

 

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application by public entities was not permitted. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Reclassifications

During the fourth fiscal quarter of 2012, the Company effectively changed its accounting policy with regard to freight out costs. Freight out costs were previously classified as cost of sales but, going forward, are classified as sales and marketing. For the nine months ended June 30, 2012, freight out costs of $2,164 were included in cost of sales. For the three months ended September 30, 2012, freight out costs of $880 were included in sales and marketing. For the fiscal year ended September 30, 2011, freight out costs of $2,395 were included in cost of sales. Given the immateriality of these costs, the Company prospectively began reflecting freight out costs in sales and marketing beginning July 1, 2012. The Company evaluated the materiality of such change from both a quantitative and qualitative basis and concluded that reclassification of such costs on a prior year basis was immaterial and, accordingly, did not reclassify such costs that were previously included in cost of sales for periods previously reported prior to the change. For the fiscal year ended September 30, 2013, freight out costs of $2,706 were included in sales and marketing.

2. Related Party Transactions

Rent expense for the fiscal years ended September 30, 2013, 2012 and 2011 included related-party payments to various WBL subsidiaries of $204, $133 and $217, respectively. As of September 30, 2013, the Company leased approximately 12,000 square feet of office space from WBL related parties.

During the second fiscal quarter of 2011, MFC entered into an agreement to purchase property located in Suzhou, China from Wearnes Global (Suzhou) Co., Ltd., a subsidiary of the Company’s majority stockholder WBL. The property consists of land use rights and building and had a total purchase price of 32,314 Chinese Renminbi (“RMB”) ($5,256 at September 30, 2013), of which 22,481 RMB ($3,657 at September 30, 2013) and 9,833 RMB ($1,599 at September 30, 2013) were subsequently allocated to the land use rights and building, respectively. MFC previously leased such property from WBL.

3. Composition of Certain Balance Sheet Components

Inventories, net of applicable write-downs, were composed of the following:

 

     September 30,  
     2013      2012  

Raw materials and supplies

   $ 27,080       $ 34,265   

Work-in-progress

     20,965         30,186   

Finished goods

     38,808         60,319   
  

 

 

    

 

 

 
   $ 86,853       $ 124,770   
  

 

 

    

 

 

 

Property, plant, and equipment, net, were composed of the following:

 

     September 30,  
     2013     2012  

Building

   $ 68,679      $ 68,252   

Machinery and equipment

     406,010        379,046   

Computers and capitalized software

     13,014        10,194   

Leasehold improvements

     14,145        13,686   

Construction-in-progress

     5,307        11,639   
  

 

 

   

 

 

 
   $ 507,155      $ 482,817   

Accumulated depreciation and amortization

     (263,099     (207,931
  

 

 

   

 

 

 
   $ 244,056      $ 274,886   
  

 

 

   

 

 

 

 

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Depreciation expense for the fiscal years ended September 30, 2013, 2012 and 2011, was $57,187, $52,249 and $44,641, respectively.

Accrued liabilities were composed of the following:

 

     September 30,  
     2013      2012  

Wages and compensation

   $ 16,822       $ 19,839   

Other accrued expenses

     14,637         13,879   
  

 

 

    

 

 

 
   $ 31,459       $ 33,718   
  

 

 

    

 

 

 

Other liabilities were composed of the following:

 

     September 30,  
     2013      2012  

Liabilities on uncertain tax positions

   $ 17,316       $ 16,691   

Other

     1,747         1,882   
  

 

 

    

 

 

 
   $ 19,063       $ 18,573   
  

 

 

    

 

 

 

4. Income Taxes

United States and foreign (loss) income before taxes were as follows:

 

     Fiscal Years Ended September 30,  
     2013     2012      2011  

United States

   $ (3,544   $ 2,184       $ (2,551

Foreign

     (61,077     33,517         49,581   
  

 

 

   

 

 

    

 

 

 
   $ (64,621   $ 35,701       $ 47,030   
  

 

 

   

 

 

    

 

 

 

The provision for income taxes consisted of the following components:

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Current:

      

Federal

   $ 578      $ 1,407      $ 2,487   

State

     18        391        509   

Foreign

     3,186        6,717        9,633   
  

 

 

   

 

 

   

 

 

 
   $ 3,782      $ 8,515      $ 12,629   
  

 

 

   

 

 

   

 

 

 

Deferred:

      

Federal

   $ (1,855   $ 400      $ (766

State

     34        (59     (383

Foreign

     (1,051     (2,640     (2,323
  

 

 

   

 

 

   

 

 

 
     (2,872     (2,299     (3,472
  

 

 

   

 

 

   

 

 

 
   $ 910      $ 6,216      $ 9,157   
  

 

 

   

 

 

   

 

 

 

 

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Deferred tax assets (liabilities) were composed of the following:

 

     September 30,  
     2013     2012  

Deferred tax assets:

    

Net operating loss

   $ 20,359      $ 12,637   

Inventories

     520        1,148   

Depreciation

     5,985        4,461   

Stock-based compensation

     3,018        1,938   

Asset impairment

     137        76   

Accrued expenses

     6,337        5,451   

Allowance for doubtful accounts

     451        131   

Warranty reserve

     227        65   

Capital loss carryforward

     —         333   

Investments

     174        177   

Foreign tax credits

     902        620   

Amortization

     2,233        —    

Other

     —         19   
  

 

 

   

 

 

 

Subtotal deferred tax assets

     40,343        27,056   

Valuation allowance

     (22,536     (12,334
  

 

 

   

 

 

 

Total deferred tax assets

     17,807        14,722   
  

 

 

   

 

 

 

Deferred tax liabilities:

    

Deferred revenue

     170        —    

Other

     43        —    
  

 

 

   

 

 

 

Total deferred tax liabilities

     213        —    
  

 

 

   

 

 

 

Net deferred tax assets

   $ 17,594      $ 14,722   
  

 

 

   

 

 

 

The Company established a valuation allowance of approximately $22,536 and $12,334 as of September 30, 2013 and 2012, respectively. The valuation allowance is recorded against deferred tax assets and consisted of net operating loss carryforwards and deferred income tax benefits attributable to the Company’s investments. During fiscal year 2013, the Company incurred significant losses in MFLEX Singapore. Evidence such as cumulative losses in recent years represented sufficient negative evidence to require a valuation allowance. As a result, the Company established a valuation allowance against its deferred tax assets related to MFLEX Singapore. The Company intends to maintain a valuation allowance on its deferred tax assets until sufficient positive evidence exists to support its reversal. Based on an evaluation of the positive and negative evidence, the Company concluded that no other valuation allowances were required on its other jurisdictions. The valuation allowance increased by $10,202 due to an increase of $10,538 attributable to MFLEX Singapore and MFE’s current year net operating losses, an increase of $6 due to change in tax rate and a decrease of $342 due to expiration of capital loss carryforwards. There is uncertainty regarding the future realization of these deferred tax assets, and management has determined that more likely than not, it will not receive future tax benefits from these assets.

As of September 30, 2013 and 2012, the Company had net operating loss carryforwards for federal tax purposes of $0 and $2,083, respectively. The Company had net operating loss carryforwards for state tax purposes of $2,779 and $7,693, respectively. In addition, the Company had net operating loss carryforwards for foreign tax purposes of approximately $114,077 and $47,580, respectively. The net operating loss carryforwards will begin to expire in 2016 for state and 2019 for foreign tax purposes. The foreign net operating loss includes pre-acquisition net operating loss from MFE in the amount of $23,479. Due to a change of ownership of MFE, utilization of the pre-acquisition net operating loss may be limited if MFE experiences a change in the nature or

 

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conduct of the business. In addition, the Company had foreign tax credit carryforwards of $902, which will begin to expire in 2022.

The provision for (benefit from) income taxes differs from the amount obtained by applying the statutory tax rate as follows:

 

     Fiscal Years Ended September 30,  
         2013             2012             2011      

Provision for income taxes at statutory rate

     34.0     35.0     35.0

Increase (decrease) in taxes resulting from:

      

State taxes, net of federal benefit

     0.0        0.3        (0.3

Foreign rate variance

     (18.0     (23.0     (22.8

Nondeductible expenses

     (1.3     0.8        0.8   

Return to provision adjustments

     1.2        0.2        1.0   

Tax contingency reserve

     (0.6     3.6        6.7   

Valuation allowance

     (16.3     0.2        0.6   

Other

     (0.4     0.3        (1.5
  

 

 

   

 

 

   

 

 

 
     (1.4 )%      17.4     19.5
  

 

 

   

 

 

   

 

 

 

The Company currently enjoys tax incentives for certain of its Asia operations. Certain Asia operations are subject to taxes at a rate lower than the statutory rates. However, these tax holidays and tax incentives may be challenged, modified or even eliminated by taxing authorities or due to changes in law. The tax incentives for the Company’s operations in Singapore expired on June 30, 2013.

Due to the valuation allowance against certain operating losses in the fiscal year ended September 30, 2013, the Company did not benefit from the tax incentives. Had the Company not received the tax incentive for its operations in Asia, net income for the fiscal years ended September 30, 2012 and 2011 would have been decreased to the pro forma amounts as illustrated below:

 

     Fiscal Years Ended September 30,  
         2012             2011      

Net income, as reported

   $ 29,485      $ 37,873   

Additional tax in China and Singapore

     (780     (1,349
  

 

 

   

 

 

 

Pro forma net income

   $ 28,705      $ 36,524   

Net income per share:

    

Basic, as reported

   $ 1.24      $ 1.58   

Basic, pro forma

   $ 1.21      $ 1.52   

Diluted, as reported

   $ 1.22      $ 1.56   

Diluted, pro forma

   $ 1.19      $ 1.50   

Undistributed earnings of the Company’s foreign subsidiaries amounted to approximately $152,302, $217,255 and $184,994 for the fiscal years ended September 30, 2013, 2012 and 2011, respectively. Those earnings are considered to be permanently reinvested due to certain restrictions under local laws as well as the Company’s plans to reinvest such earnings for future expansion in certain foreign jurisdictions. Accordingly, no provision for U.S. federal and state taxes has been provided thereon. Upon repatriation of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes and withholding taxes payable to the foreign country. It is not practicable to calculate the deferred taxes associated with these earnings because of the variability of multiple factors that would need to be assessed at the time of any assumed repatriation; however, foreign tax credits may be available to reduce federal income taxes in the event of distribution.

 

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The following is a tabular reconciliation of the total amounts of unrecognized tax benefits:

 

     Fiscal
2013
     Fiscal
2012
 

Unrecognized tax benefits at beginning of the year

   $ 15,423       $ 14,354   

Increases for positions taken in current period

     2         947   

Increases for positions taken in prior period

     —          122   
  

 

 

    

 

 

 

Unrecognized tax benefits at end of the year

   $ 15,425       $ 15,423   
  

 

 

    

 

 

 

As of September 30, 2013, the liability for income taxes associated with uncertain tax positions increased to $15,425 from $15,423 as of September 30, 2012. As of September 30, 2013 and September 30, 2012, these liabilities can be reduced by $4,908 and $4,907, respectively, primarily from offsetting tax benefits associated with the correlative effects of potential transfer pricing adjustments. The resulting net amount of $10,517 at September 30, 2013 and $10,516 at September 30, 2012, if recognized, would favorably affect the Company’s effective tax rate. The Company anticipates that there will be changes to the unrecognized tax benefit associated with uncertain tax positions due to the expiration of statutes of limitation, payment of tax on amended returns, audit settlements and other changes in reserves. However, due to the uncertainty regarding the timing of these events, a current estimate of the range of changes that may occur within the next 12 months cannot be made.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. Related to the unrecognized tax benefits noted above, the Company accrued $624 and $533 of interest for the fiscal years ended September 30, 2013 and 2012, respectively. In total, the Company has recognized a liability of $1,892 for interest as of September 30, 2013.

The Company and its subsidiaries conduct business globally and, as a result, it or one or more of its subsidiaries file income tax returns in the U.S. (both federal and in various states), local and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal tax examinations for years through fiscal 2006. With limited exceptions, the Company is no longer subject to state and foreign income tax examinations by taxing authorities for years through fiscal 2004.

The Internal Revenue Service (“IRS”) is currently examining the Company’s income tax returns for fiscal years 2007 through 2010. On August 1, 2012, the Company received a Revenue Agent Report (the “Original Report”) from the IRS relating to its examination of the Company’s income tax returns for fiscal years 2007 and 2008. On February 6, 2013, the IRS withdrew the Original Report and issued a revised Revenue Agent Report (the “Revised Report”). In the Revised Report, the IRS reduced its proposed adjustments. The remaining proposed adjustments would result in $32,363 of additional taxable income for those two years. Management believes there are numerous errors in the Revised Report, does not agree with the proposed adjustments and has contested the proposed adjustments with the IRS Appeals Office. After reviewing the Revised Report, management continues to believe that an adequate provision has been made for all of the Company’s uncertain tax positions.

The Chinese tax authority is currently auditing MFC1 and MFC2’s income tax returns for tax years 2005 through 2011. During fiscal year 2013, the Chinese tax authority raised questions related to transfer pricing on tangible goods sold by the Company to related parties. The questions were primarily on the transfer pricing methodology and the selection of comparable companies. Discussions with the Chinese tax authority surrounding this issue are ongoing. In the event that the audit results in proposed assessment by the Chinese tax authority, the Company may be required to remit the assessment regardless whether the Company contests the proposed adjustments. Management believes that an adequate provision has been made related to this audit.

 

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The outcome of these tax audits cannot be predicted with certainty. If any issues raised in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, then the Company could be required to adjust its provision for income tax in the period such resolution occurs. Any significant adjustments from the tax authorities could have a material adverse effect on the Company’s results of operations, cash flows and financial position if not resolved favorably.

5. Lines of Credit

During July 2013, MFC entered into a Line of General Credit Agreement (the “MFC Credit Line”) with Agricultural Bank of China, Suzhou Wuzhong Sub-branch (“ABC”), providing for a line of credit to MFC in an amount of 200,000 RMB ($32,531 at September 30, 2013). The MFC Credit Line became effective on July 31, 2013 and will mature on July 30, 2016. In addition, MFC and ABC entered into a Facility Offer Letter dated as of July 1, 2013, which sets forth the loan pricing. The loan interest rate for the U.S. dollar borrowing under the MFC Credit Line will be negotiated by the parties based on the lending cost in the Chinese market for the U.S. dollar transactions on the day the loan is made.

During July 2010, MFC entered into a Line of General Credit Agreement with ABC, which provided for a borrowing facility for 200,000 RMB ($32,531 at September 30, 2013). For RMB lending, the interest rate was 90% of the basic rate issued by the People’s Bank of China (“PBOC”) on the loan start date, and the basic interest rate may be adjusted once per year if the PBOC adjusts the basic rate. The interest for the U.S. dollar lending was calculated as LIBOR plus a mutually determined number of basis points. The basis points were determined according to the U.S. dollar lending cost in the Chinese domestic market. The line of credit matured in July 2013.

During May 2013, MFC entered into a Line of Credit Agreement (the “CCB Credit Line”) with China Construction Bank, Suzhou Industry Park Sub-Branch (“CCB”), which provides for a borrowing facility for 300,000 RMB ($48,796 at September 30, 2013). The CCB Credit Line will mature in May 2016. MFC and CCB have also entered into a Facility Offer Letter which sets forth the pricing negotiated by the parties. Interest on the credit line agreement for RMB lending is based on the current rate set by the People’s Bank of China at the time of borrowing. For U.S. dollar lending, the interest rate will be negotiated and determined by both parties based on the lending cost in the Chinese market for U.S. dollar transactions on the day the loan is made.

During March 2013, MFLEX Chengdu entered into a Line of Credit Agreement (the “MCH Credit Line”) with Bank of China Co., Ltd. Chengdu Development West Zone Sub-Branch (“BC”), providing for a line of credit to MFLEX Chengdu in an amount of $11,000. The MCH Credit Line will mature in February 2014. MFLEX Chengdu and BC have also entered into a Facility Offer Letter which sets forth the pricing negotiated by BC and MFLEX Chengdu. The loan interest rate shall be negotiated by the parties based on the lending cost in the Chinese market for U.S. dollar transactions on the day the loan is made.

During January 2012, MFLEX Singapore entered into a Facility Agreement (the “Facility Agreement”) with JPMorgan Chase Bank, N.A., Singapore Branch, as mandated lead arranger, the financial institutions from time to time party thereto, as lenders (the “Lenders”), and JPMorgan Chase Bank, N.A. acting through its Hong Kong Branch (“JPM”), as facility agent and as security agent. The Facility Agreement provides for a three-year, revolving credit facility, under which MFLEX Singapore may obtain loans and other financial accommodations in an aggregate principal amount of up to $50,000. The obligations of MFLEX Singapore under the Facility Agreement are (i) secured by MFLEX Singapore’s physical assets, book debt, and bank accounts; (ii) secured by the stock in MFLEX Singapore held by its parent company, MFCI; and (iii) guaranteed by the Company pursuant to a Parent Guaranty. Borrowings under the Facility Agreement will bear interest at a rate per annum equal to the sum of (a) the applicable margin, which initially is equal to 1.50 percent per annum, subject to adjustment in accordance with the Facility Agreement and (b) the bank’s cost of funds, which approximates SIBOR. All outstanding principal, and accrued and unpaid interest, under the Facility Agreement will be due and payable in January 17, 2015, the termination date of the Facility Agreement.

 

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A summary of the lines of credit is as follows:

 

     Amounts Available at      Amounts Outstanding at  
     September 30,
2013
     September 30,
2012
     September 30,
2013
     September 30,
2012
 

Line of credit (ABC)

   $ 32,531       $ 31,541       $         —        $          —    

Line of credit (CCB)

     48,796         47,312         —          —    

Line of credit (BC)

     11,000         11,000         —          —    

Line of credit (JPM)

     50,000         50,000         —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 142,327       $ 139,853       $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2013, the Company was in compliance with all covenants under its lines of credit.

6. Segment Information and Geographic Data

Based on the evaluation of the Company’s internal financial information, management believes that the Company operates in one reportable segment. The Company is primarily engaged in the engineering, design and manufacture of flexible circuit boards along with related component assemblies. Between fiscal years 2011 and 2013, the Company operated in four geographical areas: United States, China, Singapore and Other (which includes Malaysia, Korea and the United Kingdom). Net sales are presented based on the country in which the sales originate, which is where the legal entity is domiciled. The financial results of the Company’s geographic areas are presented on a basis consistent with the consolidated financial statements. The geographic area’s net sales and assets amounts include intra-company product sales transactions and subsidiary investment amounts, respectively, which are offset in the elimination line.

Financial information by geographic area is as follows:

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Net sales

      

United States

   $ 14,619      $ 23,349      $ 24,417   

China

     829,379        806,504        780,814   

Singapore

     754,026        790,867        794,048   

Other

     2,706        377        374   

Eliminations

     (813,086     (802,165     (768,092
  

 

 

   

 

 

   

 

 

 

Total

   $ 787,644      $ 818,932      $ 831,561   
  

 

 

   

 

 

   

 

 

 
     Fiscal Years Ended September 30,  
     2013     2012     2011  

Operating (loss) income

      

United States

   $ (13,604   $ (6,421   $ (13,849

China

     6,021        13,965        21,941   

Singapore

     (54,059     31,514        42,547   

Other

     (7,415     (2,428     (3,613

Eliminations

     3,194        (3,382     (963
  

 

 

   

 

 

   

 

 

 

Total

   $ (65,863   $ 33,248      $ 46,063   
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization

      

United States

   $ 2,218      $ 2,405      $ 3,626   

China

     55,657        50,393        41,596   

Singapore

     129        94        97   

Other

     150        190        211   
  

 

 

   

 

 

   

 

 

 

Total

   $ 58,154      $ 53,082      $ 45,530   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Fiscal Years Ended September 30,  
           2013                  2012        

Long-lived assets (property, plant and equipment and land use rights)

     

United States

   $ 2,325       $ 3,677   

China

     248,857         277,837   

Singapore

     433         229   

Other

     144         173   
  

 

 

    

 

 

 

Total

   $ 251,759       $ 281,916   
  

 

 

    

 

 

 

 

     Fiscal Years Ended September 30,  
           2013                 2012        

Total assets

    

United States

   $ 136,299      $ 149,484   

China

     403,824        448,759   

Singapore

     295,714        351,905   

Other

     2,022        5,057   

Eliminations

     (227,645     (258,795
  

 

 

   

 

 

 

Total

   $ 610,214      $ 696,410   
  

 

 

   

 

 

 

7. Significant Concentrations

Customers

Net sales to the Company’s largest Original Equipment Manufacturer (“OEM”) customers, inclusive of net sales made to their designated subcontractors, which accounted for more than 10% of the Company’s net sales, are presented below.

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Net sales

      

OEM—C

     75     74     44

OEM—D

     11     15     43

Net sales direct to the Company’s largest customers, exclusive of OEM subcontractor relationship, which accounted for more than 10% of the Company’s net sales, and accounts receivable from such customers are presented below. The customers consist principally of major electronic companies or electronics company subcontractors.

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Net sales

      

Customer—3

     57     61     23

Customer—5

     1     2     13

Customer—6

     13     8     4

 

     Fiscal Years Ended September 30,  
     2013     2012     2011  

Accounts Receivable

      

Customer—3

     44     74     39

Customer—5

     —         1     1

Customer—6

     21     10     4

 

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Geographic

Net sales by geographic region based on the location of the customer is summarized below:

 

     Fiscal Years Ended September 30,  
     2013      2012      2011  

United States

   $ 17,968       $ 26,125       $ 62,007   

Mexico

     8,489         39,195         165,190   

Canada

     1,965         6,245         26,543   

China

     580,804         460,489         190,097   

Hong Kong

     136,445         238,412         289,615   

Malaysia

     1,569         7,580         3,938   

Other Asia-Pacific

     34,341         22,307         17,440   

Europe

     5,301         16,339         76,711   

Other

     762         2,240         20   
  

 

 

    

 

 

    

 

 

 
   $ 787,644       $ 818,932       $ 831,561   
  

 

 

    

 

 

    

 

 

 

Sales to customers in Other Asia-Pacific noted above included Singapore, Japan, Taiwan, Vietnam and Korea. Sales to customers in Europe included Hungary and Germany.

Industry

Beginning in the second fiscal quarter of 2011, the Company elected to disclose net sales information for its tablets sector separate from its consumer electronics sector. Amounts set forth below reflect this reclassification.

During the fiscal years ended September 30, 2013, 2012 and 2011, 71%, 69% and 83% of net sales, respectively, were derived from sales to companies that provide products or services into the smartphone industry, 21%, 27% and 13% of net sales, respectively, were derived from sales to companies that provide products or services into the tablet industry, and 7%, 2% and 1% of net sales, respectively, were derived from sales to companies that provide products into the consumer electronics industry. All of these industries are subject to economic cycles and have experienced periods of slowdown in the past.

8. Commitments and Contingencies

Operating Leases

The Company leases certain of its facilities and equipment under non-cancelable operating leases which expire at various dates through 2017. Future minimum lease payments under non-cancelable operating leases at September 30, 2013 are as follows:

 

Fiscal Years Ending September 30,

   Future
Minimum
Lease
Payments
 

2014

   $ 1,304   

2015

     524   

2016

     60   

2017

     2   

2018

     —    
  

 

 

 

Total

   $ 1,890   
  

 

 

 

Rental expense for the aforementioned operating leases was $1,428, $1,201 and $2,243 for the fiscal years ended September 30, 2013, 2012 and 2011, respectively.

 

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Litigation

The Company is involved in litigation from time to time in the ordinary course of business. Management does not believe the outcome of any currently pending matters will have a material adverse effect on the Company’s financial position, results of operations or cash flows.

Other Commitments

As of September 30, 2013, the Company had outstanding purchase commitments to acquire capital assets and other materials and services of $6,454, which exclude amounts already recorded on the Consolidated Balance Sheets.

Pursuant to the laws applicable to the People’s Republic of China’s Foreign Investment Enterprises, the Company’s two wholly owned subsidiaries in China, MFC and MFLEX Chengdu, are restricted from paying cash dividends on 10% of MFC and MFLEX Chengdu’s after-tax profit, subject to certain cumulative limits. These restrictions on net income for the fiscal years ended September 30, 2013, 2012 and 2011 were $19,838, $17,741 and $16,255, respectively.

Indemnification

In the normal course of business, the Company provides indemnification and guarantees of varying scope to customers and others. These indemnities include among other things, intellectual property indemnities to customers in connection with the sale of the Company’s products, warranty guarantees to customers related to products sold and indemnities to the Company’s directors and officers to the maximum extent permitted by Delaware law. The duration of these indemnities and guarantees varies, and, in certain cases, is indeterminate. Historically, costs related to these indemnification provisions have not been significant, and with the exception of the warranty accrual (see Note 1), no liabilities have been recorded for these indemnification provisions.

9. Stock-Based Compensation

In June 2004, the Company adopted the 2004 Stock Incentive Plan (the “2004 Plan”), which is administered by the Company’s board of directors (“Board”) or a committee thereof (the “Administrator”). The 2004 Plan provides for the granting of stock options, stock appreciation rights, restricted share awards and restricted stock units to employees, directors (including non-employee directors), advisors and consultants. Grants under the 2004 Plan vest and expire based on periods determined by the Administrator, but in no event can the expiration date be later than ten years from the date of grant (five years after the date of grant if the grant is an incentive stock option to an employee who owns more than 10% of the total combined voting power of all classes of the Company’s capital stock (a “10% owner”)). Grants of stock options may be either incentive stock options or nonqualified stock options. The per share exercise price on an incentive stock option shall not be less than 100% of the fair market value of the Company’s common stock on the date the option is granted (110% of the fair market value if the grant is to a 10% owner). The per share exercise price of a nonqualified stock option shall not be less than 85% of the fair market value of the Company’s common stock on the date the stock option is granted. A total of 3,976,400 shares of common stock have been authorized for issuance and reserved under the 2004 Plan, as amended and restated to date.

The Company’s assessment of the estimated fair value of stock options and stock appreciation rights granted is affected by the Company’s stock price as well as assumptions regarding a number of complex and subjective variables and the related tax impact. The Company utilizes the Black-Scholes option valuation model to estimate the fair value of stock options and stock appreciation rights granted. Expected forfeitures are estimated based on the historical turnover of the Company’s employees. The fair value of restricted stock units granted is based on the closing price of the Company’s common stock on the date of grant.

 

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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:

 

  (a) expected volatility of the Company’s common stock price, which the Company determines based on historical volatility of the Company’s common stock;

 

  (b) expected dividends, which are zero, as the Company does not currently anticipate issuing dividends;

 

  (c) expected term of the stock option or stock appreciation right (“SSAR”), which is estimated based on the historical stock option and SSAR exercise behavior of the Company’s employees; and

 

  (d) risk free interest rate, which is based on observed interest rates (zero coupon U.S. Treasury debt securities) appropriate for the expected holding period.

Stock Options

Stock option activity for the fiscal year ended September 30, 2013 under the 2004 Plan is summarized as follows:

 

     Number of
Shares
    Weighted-
Average
Exercise
Price
     Aggregate
Intrinsic
Value
     Weighted-
Average
Remaining
Contractual
Life
 

Stock options outstanding at September 30, 2012

     219,492      $ 10.74         

Granted

     —         —          

Exercised

     (54,840     10.00         

Forfeited

     —         —          

Expired

     —         —          
  

 

 

   

 

 

       

Stock options outstanding and exercisable at September 30, 2013

     164,652      $ 10.98       $ 931         0.8   
  

 

 

   

 

 

    

 

 

    

 

 

 

Stock options vested and expected to vest at September 30, 2013

     164,652      $ 10.98       $ 931         0.8   
  

 

 

   

 

 

    

 

 

    

 

 

 

Stock option details for the fiscal years ended September 30, 2013, 2012 and 2011 are summarized as follows:

 

     Fiscal Years Ended
September 30,
 
     2013      2012      2011  

Aggregate intrinsic value of stock options exercised

   $ 278       $ 255       $ 1,346   

No stock options were granted during the fiscal years ended September 30, 2013, 2012 and 2011. No unearned compensation existed as of September 30, 2013 related to stock options.

Service and Performance-Based Restricted Stock Units

During the fiscal years ended September 30, 2013, 2012 and 2011, the Company granted service-based restricted stock units (“RSUs”) under the 2004 Plan to certain employees (including executive officers) and directors at no cost to such individuals. Each RSU represents one hypothetical share of the Company’s common stock, without voting or dividend rights. The RSUs granted to employees generally vest over a period of three years with one-third vesting on each of the anniversary dates of the grant date. Total compensation cost related to

 

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RSUs is determined based on the fair value of the Company’s common stock on the date of grant and is amortized into expense over the vesting period using the straight-line method.

The Company also grants performance-based RSUs to certain employees (including executive officers) from time to time, under the 2004 Plan. For such performance-based RSUs, the Company records stock-based compensation cost based on the grant-date fair value and the probability that the performance metrics will be achieved. Management generally considers the probability that the performance metrics will be achieved to be a 70% chance or greater (“Probability Threshold”). At the end of each reporting period, the Company evaluates the awards to determine if the related performance metrics meet the Probability Threshold. If the Company determines that the vesting of any of the outstanding performance-based RSUs does not meet the Probability Threshold, the compensation expense related to those performance-based RSUs is reversed in the period in which this determination is made. However, if at a future date conditions have changed and the Probability Threshold is deemed to be met, the previously reversed stock compensation expense, as well as all subsequent projected stock-based compensation expense through the date of evaluation, is recognized in the period in which this new determination is made.

On June 27, 2013, the Company granted 24,525 performance-based RSUs (the “June 2013 Awards”). The June 2013 Awards vest upon the achievement of defined performance objectives pertaining to such grants, with vesting to occur on or about June 27, 2014. During the fourth fiscal quarter of 2013, the Company determined that the level of probability of achievement was deemed to be less than the Probability Threshold, and as a result, the Company reversed $105 of stock-based compensation costs related to these awards.

On December 18, 2012, the Company granted 72,031 performance-based RSUs (the “December 2012 Awards”). The December 2012 Awards were originally scheduled to vest upon the achievement of defined performance objectives pertaining to such grants, with vesting to occur on or about November 15, 2015. The December 2012 Awards were converted to service-based RSUs as a result of the change in control that occurred during May 2013. Refer to the “Change in Control” section below in this Note 9.

RSU activity for the fiscal year ended September 30, 2013 under the 2004 Plan is summarized as follows:

 

     Number of
Shares
    Weighted-
Average
Grant-Date
Fair Value
 

Non-vested shares outstanding at September 30, 2012

     605,673      $ 22.02   

Granted

     438,139        17.03   

Vested

     (600,533     20.40   

Forfeited

     (106,905     24.78   
  

 

 

   

Non-vested shares outstanding at September 30, 2013

     336,374      $ 17.55   
  

 

 

   

RSU details for the fiscal years ended September 30, 2013, 2012 and 2011 are summarized as follows:

 

     Fiscal Years Ended September 30,  
     2013      2012      2011  

Service-based RSUs granted

     341,583         191,010         218,727   

Performance-based RSUs granted

     96,556         110,046         94,879   

Weighted-average grant-date fair value of non-vested RSUs granted

   $ 17.03       $ 20.31       $ 22.33   

Weighted-average fair value of RSUs vested

   $ 20.40       $ 21.09       $ 19.46   

Unearned compensation as of September 30, 2013 was $9,458 related to non-vested RSUs, which will be recognized into expense over the weighted-average remaining contractual life of the non-vested RSUs of 1.6 years.

 

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Stock Appreciation Rights

During the fiscal years ended September 30, 2013, 2012 and 2011, the Administrator approved the grant of SSARs to be settled in Company common stock. These grants were made under the 2004 Plan to certain employees (including executive officers) at no cost to such individual. Each SSAR has a base appreciation amount that is equal to the closing price of a share of the Company’s common stock on each applicable grant date as reported on the NASDAQ Global Select Market. The SSARs granted to employees generally vest either over a period of three years with one-third vesting on each of the anniversary dates of the grant date or may vest completely on the third anniversary date of the grant date and have a contractual life of 10 years. The Company’s SSARs are treated as equity awards and are measured using the initial compensation element of the award at the time of grant and the expense is recognized over the requisite service period (the vesting period) with an exercise price equal to the stock price on the date of grant. Upon exercise, each SSAR will be settled in the Company’s common stock. Whole Company shares will be issued based on the percentage of share appreciation between the weighted-average price per share for all grant dates and the fair market value per share on the exercise date, multiplied by the number of SSARs units being exercised. Total compensation cost related to SSARs is recognized over the vesting period and is determined based on the whole number of shares issued multiplied by the grant date fair value.

The grant date fair values of the SSARs granted during each of the fiscal years ended September 30, 2013, 2012 and 2011 were estimated using the Black-Scholes valuation pricing model with the following assumptions:

 

     Fiscal Years Ended September 30,  
         2013             2012             2011      

Risk-free interest rate

     0.33     0.40     0.78

Expected dividends

     —         —         —    

Expected volatility

     40.66     51.70     66.81

Expected term (in years)

     3.43        3.40        3.30   

Grant date fair value

   $ 5.32      $ 7.25      $ 10.22   

SSARs activity for the fiscal year ended September 30, 2013 under the 2004 Plan is summarized as follows:

 

     Number of
Shares
     Weighted-
Average
Exercise
Price
     Aggregate
Intrinsic
Value
     Weighted-
Average
Remaining
Contractual
Life
 

SSARs outstanding at September 30, 2012

     479,581       $ 20.88         

Granted

     216,092         17.90         

Exercised

     —          —          

Forfeited

     —          —          

Expired

     —          —          
  

 

 

          

SSARs outstanding at September 30, 2013

     695,673       $ 19.96       $ 348         7.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

SSARs exercisable at September 30, 2013

     695,673       $ 19.96       $ 348         7.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

SSARs vested and expected to vest at September 30, 2013

     695,673       $ 19.96       $ 348         7.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

SSARs details for the fiscal years ended September 30, 2013, 2012 and 2011 are summarized as follows:

 

     Fiscal Years Ended September 30,  
     2013      2012      2011  

SSARs granted

     216,092         141,107         125,780   

Aggregate intrinsic value of SSARs exercised

   $ —        $ 69       $ —    

Unearned compensation as of September 30, 2013 was $0 as all SSARs were vested.

 

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Change in Control

In connection with the stock acquisition made by UE of WBL discussed in Note 1, the Company reviewed the 2004 Plan, and its Change in Control Plan dated January 18, 2012 (the “Plan”), and determined that a “Change in Control,” as defined in the 2004 Plan and the Plan, occurred as of May 23, 2013. As a result, the Company recorded stock-based compensation expense of $9,582 during the Company’s third fiscal quarter of 2013 related to the accelerated vesting of outstanding serviced-based RSUs and SSARs, as well as the conversion of performance-based RSUs to service-based RSUs for awards outstanding as of May 23, 2013. The expense consisted of t